<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY , 2000
REGISTRATION NO. 333-93711
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
ICON HEALTH & FITNESS, INC.
(Primary Registrant)
(Exact names of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3949 87-0531206
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
1500 SOUTH, 1000 WEST, LOGAN, UTAH 84321, (435) 750-5000
(Address, including ZIP code, and telephone number, including area code, of
each Registrant's principal executive offices)
------------------------------
BRAD BEARNSON, ESQ.
1500 SOUTH, 1000 WEST
LOGAN, UTAH 84321
(435) 750-5000
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
MICHAEL A. SCHWARTZ, ESQ.
GREGG B. SHULKLAPPER, ESQ.
WILLKIE FARR & GALLAGHER
787 SEVENTH AVENUE
NEW YORK, NEW YORK 10019
(212) 728-8000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
<TABLE>
<CAPTION>
PRIMARY STANDARD INDUSTRIAL I.R.S. EMPLOYER
NAME OF ADDITIONAL REGISTRANTS* STATE OF INCORPORATION CLASSIFICATION CODE IDENTIFICATION CODE
------------------------------- ---------------------- --------------------------- -------------------
<S> <C> <C> <C>
Jumpking, Inc................................ Utah 3949 87-0481821
510152 N.B. Ltd.............................. Canada 3949 N/A
Universal Technical Services, Inc............ Utah 3949 87-0468754
ICON International Holdings, Inc............. Delaware 3949 84-1425493
</TABLE>
------------------------
* Address and telephone number of principal executive offices are the same as
ICON Health & Fitness, Inc.
EACH REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL EACH REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
THIS INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT OFFER THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, , 2000.
ICON HEALTH & FITNESS, INC.
EXCHANGE OFFER
$44,282,000
12% NOTES DUE 2005
This exchange offer will expire at midnight, New York City Time, on
, 2000, unless extended.
TERMS OF THE EXCHANGE OFFER:
- WE ARE OFFERING A TOTAL OF $44,282,000 OF EXCHANGE NOTES, WHICH ARE
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION, TO ALL HOLDERS OF
OLD NOTES.
- WE WILL EXCHANGE THE EXCHANGE NOTES FOR ALL OLD NOTES THAT ARE VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE EXCHANGE OFFER.
- YOU MAY WITHDRAW TENDERS OF OLD NOTES AT ANY TIME BEFORE THE EXCHANGE
OFFER EXPIRES.
- WE WILL NOT RECEIVE ANY PROCEEDS FROM THE EXCHANGE OFFER.
- THE TERMS OF THE EXCHANGE NOTES ARE SUBSTANTIALLY IDENTICAL TO THOSE OF
THE OLD NOTES, EXCEPT FOR TRANSFER RESTRICTIONS AND REGISTRATION RIGHTS
RELATING TO THE OLD NOTES.
- THE OLD NOTES ARE, AND THE EXCHANGE NOTES WILL BE, GUARANTEED BY THE
SUBSIDIARY GUARANTORS SET FORTH IN THIS PROSPECTUS.
- THERE IS NO EXISTING MARKET FOR THE EXCHANGE NOTES, AND WE DO NOT INTEND
TO APPLY FOR THEIR LISTING ON ANY SECURITIES EXCHANGE.
See the "Description of Notes" section on page 59 for more information about
the exchange notes.
THIS INVESTMENT INVOLVES RISKS. SEE THE SECTION ENTITLED "RISK FACTORS" THAT
BEGINS ON PAGE 9 FOR A DISCUSSION OF THE RISKS THAT YOU SHOULD CONSIDER PRIOR TO
TENDERING YOUR OLD NOTES FOR EXCHANGE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 9
Use Of Proceeds............................................. 17
Capitalization.............................................. 17
Unaudited Pro Forma Financial Data.......................... 18
Selected Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 30
Management.................................................. 38
Security Ownership of Certain Beneficial Owners and
Management................................................ 43
Transactions Between Our Company and Officers, Directors and
Principal Stockholders.................................... 47
The Exchange Offer.......................................... 51
Description Of The Notes.................................... 59
Book-Entry; Delivery And Form............................... 100
Description Of Material Indebtedness........................ 101
Material United States Federal Income Tax Consequences...... 103
Plan Of Distribution........................................ 107
Legal Matters............................................... 108
Experts..................................................... 108
Where You Can Find More Information......................... 108
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT ICON HEALTH &
FITNESS, INC. AND THE EXCHANGE OF NOTES. IT MAY NOT CONTAIN ALL THE INFORMATION
THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THIS ENTIRE PROSPECTUS, INCLUDING
THE FINANCIAL DATA AND RELATED NOTES, AND THE DOCUMENTS TO WHICH WE HAVE
REFERRED YOU BEFORE MAKING AN INVESTMENT DECISION. THE TERMS "ICON," "WE," "OUR"
AND "US," AS USED IN THIS PROSPECTUS, REFER TO ICON HEALTH & FITNESS, INC. AND
ITS SUBSIDIARIES AS A CONSOLIDATED ENTITY, EXCEPT WHERE IT IS CLEAR THAT THESE
TERMS MEAN ONLY ICON HEALTH & FITNESS, INC. THE TERM "IHF HOLDINGS" REFERS TO
IHF HOLDINGS, INC., OUR FORMER PARENT COMPANY, AND THE TERM "ICON FITNESS"
REFERS TO ICON FITNESS CORPORATION, IHF HOLDINGS' PARENT COMPANY.
THE COMPANY
We are one of the largest manufacturers and marketers of home fitness
equipment in the United States. Our focus is to address consumers' interest in a
healthy, active lifestyle with a broad range of high quality products at a
variety of price/value relationships specifically targeted to meet different
consumers' health and fitness needs. Our line of home fitness aerobic products
includes treadmills, elliptical cross-trainers, which offer a low-impact,
high-intensity aerobic workout which harnesses the momentum of a natural gliding
motion and eliminates the impact of typical running or walking, exercise bikes,
stair steppers, skiers and upright rowers and our line of anaerobic fitness
products includes home gyms and weight benches. We also offer trampolines,
recreational sports products, sports medicine products and fitness accessories.
We market the majority of our products under the brand names NordicTrack,
ProForm, HealthRider, Image, Weider, and JumpKing. In addition, we manufacture a
complete line of premier home fitness equipment under the Reebok brand name,
under a licensing agreement.
SEPTEMBER RECAPITALIZATION
We originally issued the 12% notes on September 27, 1999 in connection with
a restructuring of our capitalization that included an approximately
$40 million equity investment in our company. The principal equity investors
included affiliates of Bain Capital and its designees, members of our management
and Credit Suisse First Boston and its affiliates. Our September
recapitalization also included a refinancing of our then existing bank credit
facility.
Prior to our September recapitalization, we were a wholly owned subsidiary
of IHF Holdings, which was, in turn, a wholly owned subsidiary of ICON Fitness.
As part of our September recapitalization, we closed a private exchange offer
and consent solicitation in which:
(1) participating holders of our then outstanding 13% Senior Subordinated
Notes due 2002 received the following consideration for each $1,000
principal amount of 13% notes held:
- $395 in cash,
- $444 principal amount of 12% notes,
- an additional cash payment equal to the sum of (i) interest due on the
tendered 13% notes on July 15, 1999 (with additional interest thereon
from July 15, 1999 to the closing of the exchange offers at the rate of
17% per annum) and (ii) interest accrued after July 15, 1999 on the
tendered 13% notes to the closing of the exchange offers at the rate of
17% per annum, and
- warrants to purchase 4.25 shares of common stock of our new parent
company, HF Holdings, Inc. ("HF Holdings").
1
<PAGE>
(2) participating holders of 15% Senior Secured Discount Notes due 2004 of
IHF Holdings received the following consideration for each $1,000
principal amount at maturity held:
- warrants to purchase 5.26 shares of HF Holdings common stock
(3) participating holders of 14% Senior Discount Notes due 2006 of ICON
Fitness received the following consideration for each $1,000 principal
amount at maturity held:
- warrants to purchase 1.24 shares of HF Holdings common stock
Prior to our September recapitalization there were issued and outstanding
$101,250,000 principal amount of our 13% notes, $123,700,000 principal amount at
maturity of 15% notes of IHF Holdings and $162,000,000 principal amount at
maturity of 14% notes of ICON Fitness. All but $1.5 million principal amount of
our 13% notes and $7.0 million principal amount at maturity of 14% notes of ICON
Fitness were tendered and accepted for exchange in the September private
exchange offer and consent solicitation. Those untendered notes remain
outstanding under amended indentures.
In connection with the September recapitalization, we became a wholly owned
Subsidiary of HF Holdings, Inc.
------------------------
We were incorporated in Delaware in August of 1994. Our principal executive
offices are located at 1500 South 1000 West, Logan, Utah 84321, and our
telephone number is (435) 750-5000.
2
<PAGE>
SUMMARY OF THE EXCHANGE OFFER
As of the date of this prospectus, $44,282,000 aggregate principal amount of
unregistered 12% notes are outstanding. Simultaneously with the September
recapitalization, we entered into an exchange and registration rights agreement
with the initial holders of the 12% notes in which we agreed to deliver this
prospectus to you and to complete this exchange offer. You should read the
description under "--Summary of the Exchange Notes" and "Description of the
Notes" for more information about the registered notes.
We believe that the notes to be issued in the exchange offer may be resold
by you without compliance with the registration and prospectus delivery
provisions of the Securities Act, unless you are an affiliate of our company.
You should read the discussion under the heading "The Exchange Offer" for
further information regarding the exchange offer and resale of the notes.
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<S> <C>
The Exchange Offer................ We are offering to exchange $1,000 principal amount of our
12% notes due 2005 which have been registered under the
Securities Act for each $1,000 principal amount of our
outstanding 12% notes due 2005 which were issued in
September 1999 in a private offering. In order to be
exchanged, an old note must be properly tendered and
accepted. We will exchange all notes validly tendered and
not validly withdrawn.
Expiration and Exchange Dates..... This offer will expire at midnight, New York City time, on
, 2000, unless we extend it, and we will
consummate the exchange on the next business day.
Exchange and Registration Rights
Agreement....................... You have the right to exchange the old notes that you now
hold for exchange notes with substantially identical terms.
This exchange offer is intended to satisfy these rights.
After the exchange offer is complete, you will no longer be
entitled to any exchange or registration rights with respect
to your notes.
Conditions........................ This offer is conditioned only upon compliance with the
securities laws. The offer applies to any and all old notes
tendered by the deadline.
Withdrawal Rights................. You may withdraw your tender of old notes at any time before
the offer expires.
Federal Income Tax Consequences... The exchange will not be a taxable event for United States
federal income tax purposes. You will not recognize any
taxable gain or loss or any interest income as a result of
the exchange.
Resale Without Further
Registration.................... We believe that the exchange notes may be offered for
resale, resold and otherwise transferred by you without
compliance with the registration and prospectus delivery
provisions of the Securities Act so long as the following
statements are true:
- you acquire the exchange notes issued in the exchange
offer in the ordinary course of your business;
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
- you are not an "affiliate," as defined under Rule 405 of
the Securities Act, of our company;
- you are not participating, and do not intend to
participate, and have no arrangement or understanding with
any person to participate, in the distribution of the
exchange notes issued to you in the exchange offer.
By tendering your notes as described below, you will be
making representations to this effect.
Transfer Restrictions on Exchange
Notes........................... You may incur liability under the Securities Act if:
(1) any of the representations listed above are not true;
and
(2) you transfer any new note issued to you in the exchange
offer without:
- delivering a prospectus meeting the requirements of
the Securities Act; or
- an exemption from the Securities Act's requirements to
register your exchange notes.
We do not assume or indemnify you against such liability.
Each broker-dealer that is issued exchange notes for its own
account in exchange for old notes that were acquired as a
result of market-making or other trading activities, must
acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any
resale of the exchange notes. A broker-dealer may use this
prospectus for an offer to resell, a resale or other
retransfer of the exchange notes issued to it in the
exchange offer.
Procedures for Tendering Old
Notes........................... Each holder of old notes who wishes to accept the exchange
offer must:
- complete, sign and date the accompanying letter of
transmittal, or a facsimile thereof; or
- arrange for the Depository Trust Company to transmit
required information to the exchange agent in connection
with a book-entry transfer. You must mail or otherwise
deliver such documentation and your old notes to The Bank
of New York, as exchange agent, at the address set forth
under "The Exchange Offer--Exchange Agent."
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Failure to Exchange will affect
you adversely................... If you are eligible to participate in the exchange offer and
you do not tender your old notes, you will not have any
further registration or exchange rights and your old notes
will continue to be subject to some restrictions on
transfer. Accordingly, the liquidity of the old notes could
be adversely affected.
Special Procedures for Beneficial
Owners.......................... If you beneficially own old notes registered in the name of
a broker, dealer, commercial bank, trust company or other
nominee and you wish to tender your old notes in the
exchange offer, you should contact such registered holder
promptly and instruct it to tender on your behalf. If you
wish to tender on your own behalf, you must, before
completing and executing the letter of transmittal for the
exchange offer and delivering your old notes, either arrange
to have your old notes registered in your name or obtain a
properly completed bond power from the registered holder.
The transfer of registered ownership may take considerable
time.
Guaranteed Delivery Procedures.... You may comply with the procedures described in this
prospectus under the heading "The Exchange Offer--Guaranteed
Delivery Procedures" if you wish to tender your old notes
and:
- time will not permit your required documents to reach the
exchange agent by the expiration date of the exchange
offer,
- you cannot complete the procedure for book-entry transfer
on time, or
- your old notes are not immediately available.
</TABLE>
5
<PAGE>
SUMMARY OF THE EXCHANGE NOTES
The exchange notes have the same financial terms and covenants as the old
notes, which are as follows:
<TABLE>
<S> <C>
Issuer............................ ICON Health & Fitness, Inc.
Maturity.......................... September 27, 2005.
Interest.......................... Interest accrues from September 27, 1999 at the rate of 12%
per year, payable semi-annually in arrears on each
January 15 and July 15, beginning on January 15, 2000.
Ranking........................... The exchange notes are general unsecured obligations of
ICON, subordinated in right of payment to all of our
existing and future indebtedness outstanding under our
credit facilities. The indenture governing the exchange
notes limits senior indebtedness to indebtedness under the
credit facilities. For a description of the credit
facilities, see "Material Indebtedness--Credit Facilities."
In addition, the exchange notes are effectively subordinated
to all secured obligations to the extent of the assets
securing those obligations, including the credit facilities.
The indenture for the exchange notes permits us and our
subsidiaries to incur additional indebtedness, including
senior indebtedness, subject to limitations. The exchange
notes are also effectively subordinated in right of payment
to all existing and future liabilities of any subsidiaries
of ICON which do not guarantee the exchange notes.
Optional Redemption............... We have the right at any time to redeem all (but not part)
of the exchange notes and old notes at the redemption prices
listed in "Description of the Notes" under the heading
"Redemption--Optional Redemption."
Change of Control................. If an event treated as a change of control of our company
occurs, including for example, a sale of all or
substantially all of our assets or the acquisition by a
third party of a majority of HF Holdings' common stock, we
must make an offer to purchase any and all of the exchange
notes then outstanding from you at a purchase price equal to
101% of their aggregate principal amount, plus accrued and
unpaid interest, if any, to the date of purchase. We cannot
assure you that we will have the financial resources
necessary to purchase the exchange notes upon a change of
control or that the purchase will be permitted under our
credit facilities. For a summary of what constitutes change
of control please see "Description of the
Notes--Covenants--Change of Control."
Covenants......................... The indenture for the exchange notes contains covenants
that, among other things, limit our ability, and the ability
of our subsidiaries, to incur additional indebtedness, pay
dividends or make other distributions, make investments,
dispose of assets, issue capital stock of subsidiaries,
create liens securing indebtedness, enter into transactions
with affiliates, or enter into mergers or consolidations or
sell all or substantially all of our or their assets.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Subsidiary Guarantors............. Each of our domestic subsidiaries is a guarantor of the
exchange notes. Our foreign subsidiaries are not guarantors
of the notes unless they guarantee our indebtedness or
indebtedness of another subsidiary guarantor of the exchange
notes. The subsidiary guarantees are joint and several, full
and unconditional and general unsecured obligations of the
subsidiary guarantors. The subsidiary guarantees are
subordinated in right of payment to all existing and future
senior indebtedness of the subsidiary guarantors, including
guarantees of the credit facilities, and are also
effectively subordinated to all secured obligations of the
subsidiary guarantors to the extent of the assets securing
such obligations, including the credit facilities. The
indenture for the exchange notes permits the subsidiary
guarantors to incur additional indebtedness, including
senior indebtedness, subject to limitations.
</TABLE>
For additional information regarding the notes, see "Description of the
Notes" and "Material United States Federal Income Tax Consequences."
RISK FACTORS
See "Risk Factors" immediately following this summary for a discussion of
risks relating to the exchange notes, all of which apply to the old notes as
well.
7
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31, FOR THE NINE MONTHS ENDED
------------------------------------------------------------- ------------------------------
FEBRUARY 27, FEBRUARY 26,
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- ------------ ------------
(1) (2) (3)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales................... $530.8 $747.6 $836.2 $749.3 $710.2 $ 558.2 $ 570.8
Cost of sales............... 378.4 541.5 597.8 536.0 514.0 401.8 414.6
------ ------ ------ ------ ------ ------- -------
Gross profit................ 152.4 206.1 238.4 213.3 196.2 156.4 156.2
Operating Expenses:
Selling................... 68.7 93.9 132.4 120.7 107.6 78.5 70.5
Research and
development............. 5.2 6.8 7.6 7.8 7.7 5.6 6.0
General and
administrative.......... 31.1 47.8 56.7 60.9 53.4 39.9 46.0
Weider Settlement &
HealthRider
integration............. -- -- 21.5 -- -- -- --
Compensation expense
attributable to
options................. 39.0 2.8 -- -- -- -- --
------ ------ ------ ------ ------ ------- -------
Total operating expenses.... 144.0 151.3 218.2 189.4 168.7 124.0 122.5
------ ------ ------ ------ ------ ------- -------
Income from operations...... 8.4 54.8 20.2 23.9 27.5 32.4 33.7
Interest expense............ (17.3) (27.9) (33.6) (35.0) (33.0) (24.6) (25.6)
Amortization of deferred
financing fees............ (1.2) (2.5) (2.5) (4.3) (7.0) (4.5) (1.9)
------ ------ ------ ------ ------ ------- -------
Income (loss) before income
taxes and extraordinary
item...................... (10.1) 24.4 (15.9) (15.4) (12.5) 3.3 6.2
Provision for (benefit from)
income taxes.............. (3.6) 10.8 (4.0) (5.9) 12.1 1.1 7.3
------ ------ ------ ------ ------ ------- -------
Income (loss) before
extraordinary item........ (6.5) 13.6 (11.9) (9.5) (24.6) 2.2 (1.1)
Extraordinary loss on
extinguishment of debt.... -- -- -- -- -- -- (1.8)
------ ------ ------ ------ ------ ------- -------
Net income (loss)........... $ (6.5) $ 13.6 $(11.9) $ (9.5) $(24.6) $ 2.2 $ (2.9)
====== ====== ====== ====== ====== ======= =======
OTHER DATA:
Depreciation and
amortization.............. $ 6.9 $ 7.2 $ 13.4 $ 16.7 $ 17.4 $ 13.2 $ 12.1
Capital expenditures........ 8.0 15.4 16.0 11.8 11.6 9.1 10.1
Deficiency to cover fixed
charges(4)(8)............. 10.1 --(5) 15.9 15.4 12.5 --(6) --(7)
BALANCE SHEET DATA (AT THE END
OF THE PERIOD):
Cash........................ 4.1 19.3 5.6 3.9 4.3 9.7
Working capital............. 137.7 157.3 220.1 152.9 108.0 177.7
Total assets................ 281.9 306.5 456.9 363.1 331.9 414.5
Total indebtedness.......... 207.8 213.6 327.0 274.5 260.6 292.8
Stockholder's equity
(deficit)................. (14.8) 2.0 (10.7) (20.3) (47.8) (12.3)
</TABLE>
------------------------------
(1) In fiscal 1995, a $39.0 million compensation expense was incurred with
respect to management stock options.
(2) In fiscal 1996, a $2.8 million compensation expense was incurred with
respect to management stock options
(3) In fiscal 1997, the Company incurred a $14.0 million step-up in value of
HealthRider inventory purchased. This item was a non-cash expense and was
required for purchase accounting per GAAP. The Company also incurred Weider
settlement expenses of $16.6 million related to the settlement of various
disputes. This cash expense item includes one-time payments to various
Weider affiliates as well as associated legal expenses and professional
fees. The Company also incurred HealthRider integration costs of $4.9
million.
(4) Earnings consist of income (loss) before income taxes and extraordinary item
plus fixed charges. Fixed charges consist of interest expense on debt,
interest portion of rentals and amortization of deferred financing fees.
(5) Ratio of earnings to fixed charges is 1.8.
(6) Ratio of earnings to fixed charges is 1.1.
(7) Ratio of earnings to fixed charges is 1.2.
(8) The Company's deficiency to cover fixed charges was $9.7 million for the pro
forma year ended May 31, 1999 and the Company's excess to cover fixed
charges was $10.2 million for the pro forma nine months ended February 26,
2000.
8
<PAGE>
RISK FACTORS
The exchange notes, like the old notes, entail the following risks:
WE HAVE SUBSTANTIAL EXISTING DEBT AND DEBT SERVICE REQUIREMENTS AND WE MAY NOT
GENERATE SUFFICIENT CASH FLOW TO MAKE PAYMENTS ON AND TO REFINANCE SUCH DEBT,
INCLUDING THE EXCHANGE NOTES, WHICH COULD ADVERSELY IMPACT OUR BUSINESS AND YOUR
INVESTMENT.
We have a significant amount of indebtedness. As of February 26, 2000, our
consolidated indebtedness was approximately $292.8 million, of which
$44.3 million was senior indebtedness. Further, the terms of the indenture for
the exchange notes permit us to incur substantial indebtedness in the future.
Our ability to make payments on and to refinance our indebtedness, including
the exchange notes, will depend on our ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. Based on our current level of operations and anticipated cost savings
and operating improvements, we believe our cash flow from operations and
available borrowings under our credit facilities will be adequate to meet our
liquidity needs over the next several years.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule, in the amounts projected or at all,
or that future borrowings will be available to us under our credit facilities in
amounts sufficient to enable us to pay our indebtedness, including the exchange
notes, or to fund our other liquidity needs. If we cannot generate sufficient
cash flow from operations to make scheduled payments on the exchange notes in
the future, we may need to refinance all or a portion of our indebtedness,
including the exchange notes, on or before maturity, sell assets, delay capital
expenditures, or seek additional equity. We cannot assure you that we will be
able to refinance any of our indebtedness, including the exchange notes, on
commercially reasonable terms or at all or that any other action can be effected
on satisfactory terms, if at all.
Our substantial indebtedness could have other important consequences to you.
For example, it could:
- make it more difficult for us to satisfy our obligations with respect to
the exchange notes;
- increase our vulnerability to general adverse economic and industry
conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow for other purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate, thereby placing us at a
competitive disadvantage compared to our competitors that may have less
debt;
- limit, by the financial and other restrictive covenants in the exchange
notes, together with those in the credit facilities, among other things,
our ability to borrow additional funds; and
- have a material adverse effect on us if we fail to comply with the
covenants in the exchange notes and credit facilities, because such
failure could result in an event of default which, if not cured or waived,
could result in a substantial amount of our indebtedness becoming
immediately due and payable.
9
<PAGE>
THERE IS NO PUBLIC MARKET FOR THE EXCHANGE NOTES, SO YOU MAY BE UNABLE TO SELL
YOUR EXCHANGE NOTES.
The exchange notes are new securities for which there is currently no
market. Consequently, the exchange notes will be relatively illiquid, and you
may be unable to sell your exchange notes. We do not intend to apply for listing
of the exchange notes on any securities exchange or for the inclusion of the
exchange notes in any automated quotation system. Accordingly, we cannot assure
you that a liquid market for the exchange notes will develop.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE EXCHANGE NOTES IS SUBORDINATED TO OUR
SENIOR DEBT, WHICH DECREASES THE CHANCES THAT YOU WILL RECEIVE DISTRIBUTIONS IN
THE EVENT OF A BANKRUPTCY, LIQUIDATION OR REORGANIZATION OF US OR THE SUBSIDIARY
GUARANTORS.
The exchange notes and the subsidiary guarantees are subordinated in right
of payment to the payment in full in cash of all indebtedness under the credit
facilities, which will be secured by substantially all of our and our
subsidiaries' domestic assets. As a result, upon any distribution to our
creditors or the creditors of the subsidiary guarantors in a bankruptcy,
liquidation or reorganization or similar proceeding relating to our company or
our subsidiaries or our company's and our subsidiaries' property, the lenders
under the credit facilities will be entitled to be paid in full under the credit
facilities before any payment may be made with respect to the exchange notes or
the subsidiary guarantees, other than payment consisting of securities
subordinated to indebtedness under the credit facilities to the same extent as
the exchange notes. All payments on the exchange notes and the subsidiary
guarantees will be blocked in the event of a payment default under the credit
facilities and may be blocked for up to 179 out of 360 consecutive days in the
event of non-payment defaults under the credit facilities.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the subsidiary guarantors, the holders of the
exchange notes will share with trade creditors and all other holders of our
unsecured debt and of our subsidiary guarantors in the assets remaining after we
and the subsidiary guarantors have paid all indebtedness under the credit
facilities. Because the exchange notes indenture requires that amounts otherwise
payable to holders of the exchange notes in a bankruptcy or similar proceeding
be paid to lenders under the credit facilities, holders of the exchange notes
may, in the event that senior indebtedness is not fully secured, receive less,
ratably, than holders of trade payables in any such proceeding.
Our foreign subsidiaries, other than our Canadian subsidiaries, will not
guarantee the exchange notes. In the event of a bankruptcy, liquidation or
reorganization of any of our non-guarantor subsidiaries, holders of their
indebtedness and their trade creditors will be entitled to payment of their
claims from the assets of those subsidiaries before any assets are made
available for distribution to us. European revenues accounted for approximately
4.9%, 5.4% and 5.3% of revenues in Fiscal 1997, 1998 and 1999, respectively.
The exchange notes are not secured by any of our assets or those of our
subsidiaries. We have granted a security interest to the lenders under the
credit facilities in all of the capital stock of our domestic subsidiaries and
in 65% of the capital stock of our foreign subsidiaries, as well as in all of
our tangible and intangible assets and those of our domestic subsidiaries. If we
become insolvent or are liquidated, or if the lenders under the credit
facilities accelerate payment under any of the credit facilities, they will have
a prior claim with respect to these assets.
A HOLDER OF NOTES MAY NOT BE ABLE TO REQUIRE US TO REPURCHASE ITS NOTES AS A
RESULT OF A SALE OF LESS THAN ALL OF OUR ASSETS.
The indenture governing the notes contains a provision that if a "Change of
Control" occurs, we will be required to make an offer to each holder of notes to
purchase all of the then outstanding notes and then purchase all notes validly
tendered pursuant to such offer. The definition of Change of
10
<PAGE>
Control includes a phrase relating to the sale, lease, transfer, conveyance or
other disposition of "all or substantially all" of our company's and some of our
subsidiaries' assets taken as a whole. Although there is a limited body of case
law interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, a holder of notes
may not be able to require us to repurchase such notes as a result of a sale of
less than all of our assets.
WE RELY ON A LIMITED NUMBER OF MAJOR CUSTOMERS, THE LOSS OF ANY OF WHICH COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our three largest customers together accounted for approximately 39.6%,
42.0% and 54.1% of our revenues in fiscal years 1997, 1998 and 1999,
respectively. Our largest customer, Sears, Roebuck and Co., accounted for 29.0%,
32.5% and 38.4% of our revenues in fiscal years 1997, 1998 and 1999,
respectively. The level of our sales to these customers depends in large part on
consumers' continuing commitment to home fitness equipment products and on the
success of the customers' efforts to market and promote our products, as well as
our competitiveness in terms of price, quality, product innovation, customer
service and other factors. Consistent with industry practice, we do not have
long-term purchase agreements or other commitments as to levels of future sales.
The loss of, or a substantial decrease in the amount of purchases by, or a
write-off of any significant receivables due from any of our major customers
would have a material adverse effect on our business.
SHORT PRODUCT LIFE CYCLES CAN MAKE IT DIFFICULT TO MAINTAIN CONTINUED INTEREST
IN OUR PRODUCTS.
Product life cycles can be short in the home fitness industry and innovation
is an important component of competition. While we emphasize new product
innovation and product repositioning (i.e., design changes or revised marketing
strategies), we may be unable to continue to develop competitive products in a
timely manner or to respond adequately to market trends. In addition, we may not
be able to ensure that repositioned products will gain initial market
acceptance, that interest in our products will be sustained, or that significant
start-up costs with respect to new products will be recouped. Moreover, although
our management believes that fitness and health activities have become important
for consumers, we cannot ensure that interest in any particular fitness activity
will be sustained.
We were one of the first companies to introduce motorized treadmills for
home use and believe that we are currently the largest manufacturer of motorized
treadmills, with motorized treadmill sales in fiscal years 1997, 1998 and 1999
of $452.9 million, $474.0 million and $437.0 million, respectively, representing
54.2%, 63.3% and 61.5%, respectively, of our revenues in each of such years. We
could be adversely affected if we experienced a significant decline in the
popularity of our motorized treadmills and were unable to develop and introduce
other successful products in a timely manner.
OUR BUSINESS ENVIRONMENT IS HIGHLY COMPETITIVE, WHICH CAN NEGATIVELY IMPACT OUR
OPERATING RESULTS.
We operate in a highly competitive environment. We compete in the U.S. with
a number of domestic manufacturers, domestic direct importers and foreign
companies exporting products to the U.S. Some of our competitors, which include
LifeFitness, Precor, Schwinn and Canstar Sports Inc., a subsidiary of Nike Inc.,
are better capitalized than us and may have greater financial and other
resources than those available to us. There are a number of companies who
produce products for the institutional fitness markets (spas and gyms) with
considerable expertise in manufacturing who have become competitors in the home
market. There are also manufacturers of home exercise equipment in Europe and
Asia who may also increase or commence efforts to sell their products in the
U.S. market. In addition, there are no significant technological or
manufacturing barriers to entry into some segments of the home fitness equipment
market, although many companies in the industry, including our company, have
sought and received numerous patents in an effort to protect their competitive
11
<PAGE>
position. We believe that the principal competitive factors affecting our
business include price, quality, brand name recognition, product innovation and
customer service.
OUR SALES ARE HIGHLY PRICE SENSITIVE, WHICH CAN PREVENT US FROM PASSING COST
INCREASES ON TO OUR CUSTOMERS.
Sales to mass merchandisers, which are among our primary customers, are
highly price sensitive. We set many product prices on an annual basis but in
most cases we purchase raw materials and components under purchase orders
providing components for periods less than one year. Accordingly, we set prices
for many products before we have complete knowledge of the costs of raw
materials and components and sometimes before product development is complete
and production costs have been firmly established. After we have established
prices, we may be unable to pass cost increases along to our customers, or to
compete as effectively if we seek to pass such costs along, which could have a
material adverse effect on us.
OUR RELIANCE ON FOREIGN SUPPLIERS EXPOSES US TO THE GENERAL RISKS OF DOING
BUSINESS ABROAD.
Since we purchase components and finished products from foreign suppliers,
we are subject to the general risks of doing business abroad, including delays
in shipment, work stoppages, adverse fluctuations in currency exchange rates,
increases in import duties and tariffs, changes in foreign regulations, changes
in most-favored-nation status and political instability. In addition, although
we seek to maintain dual sources for the material and components required for
our products, we rely on single sources for certain of our component parts,
including electronic consoles and controllers, and finished products. The
occurrence of any such events relating to our foreign suppliers or the loss of
certain of these suppliers could adversely affect our business until alternative
supply arrangements could be secured, particularly if such loss occurred during
our key production periods. We may be unable to ensure that we would be able to
obtain products and supplies on substantially similar terms should any of these
risks materialize.
ECONOMIC CONDITIONS FOR RETAIL BUSINESSES IN GENERAL CAN AFFECT OUR BUSINESS,
AND WE RELY ON CONTINUING CONSUMER INTEREST IN FITNESS ACTIVITIES.
Our customers are primarily retail businesses. Retail businesses may be
adversely affected by unfavorable local, regional or national economic
developments which result in reduced consumer spending. We cannot ensure that an
economic downturn would not have a material adverse effect on our customers and,
therefore, on us. In addition, we cannot ensure that consumer interest in
fitness and health activities will be sustained.
OUR SALES FLUCTUATE BY SEASON, WHICH CAN HAVE A MATERIAL ADVERSE EFFECT ON OUR
OPERATING RESULTS AND CASH FLOW.
Historically, we have sold the majority of our products to our customers in
our second and third interim reporting periods (I.E., from September through
February). Increased sales and distribution typically have occurred in the
Christmas retail season and the beginning of a new calendar year because of
increased customer promotions and consumer purchases. We have frequently
incurred operating losses in the first and fourth interim reporting periods of
our fiscal year. If actual sales for a period do not meet or exceed projected
sales for that period, expenditures and inventory levels could be
disproportionately high for such period and our cash flow for that period and
future periods could be adversely affected. The timing of large orders from
customers and the mix of products sold may also contribute to quarterly or other
periodic fluctuations.
12
<PAGE>
WE DEPEND ON KEY MEMBERS OF OUR MANAGEMENT TEAM.
Our success depends to a considerable extent on the performance of our
senior management team. While we believe that our senior management team has
significant depth, the loss of services of our senior executives, particularly
the loss of either Scott Watterson, our Chief Executive Officer, or Gary
Stevenson, our Chief Operating Officer, could have a material adverse effect on
us. Although we entered into three-year employment agreements with
Messrs. Watterson and Stevenson in September 1999, they will be able to
terminate their employment immediately for cause (as defined) or without cause
upon six months' notice or, under certain circumstances, three months' notice.
WE ARE CONTROLLED BY CERTAIN STOCKHOLDERS WHO MAY SUBSTANTIALLY INFLUENCE OUR
BUSINESS.
HF Investment Holdings, LLC ("HF Investment Holdings") owns approximately
79.7% (51.6% on a fully diluted basis) of the outstanding capital stock of HF
Holdings, our parent company. Affiliates of Bain Capital, Inc. own 59.8% of the
membership interests of HF Investment Holdings (49.8% assuming the exercise in
full of a warrant to acquire membership interests by Credit Suisse First
Boston). Through such ownership of HF Investment Holdings and the provisions of
the stockholders agreement and operating agreement for HF Investment Holdings,
these affiliates of Bain Capital have the ability to elect a majority of the
Boards of Directors of HF Holdings and our company and to determine the outcome
of significant corporate transactions or other matters submitted to the
stockholders for approval.
WE ARE SUBJECT TO PRODUCT LIABILITY CLAIMS AND OTHER LITIGATION.
Due to the nature of our products, we are subject to product liability
claims involving personal injuries allegedly related to our products. Our
involvement in the trampoline business through our JumpKing subsidiary has
especially exposed us to such claims. We currently carry an occurrence-based
product liability insurance policy. The current policy provides coverage for the
period from October 1, 1998 to September 30, 2001 of up to $25 million per
occurrence, and $25 million in the aggregate. The policy has a deductible on
each claim of $250,000 for claims related to trampolines and $100,000 for claims
related to all other products. We believe that our insurance is generally
adequate to cover product liability claims. Nevertheless, currently pending
claims and any future claims are subject to the uncertainties related to
litigation and the ultimate outcome of any such proceedings or claims cannot be
predicted. Due to uncertainty with respect to the nature and extent of
manufacturers' and distributors' liability for personal injuries, we cannot
ensure that our product liability insurance is or will be adequate to cover such
claims. In addition, we cannot ensure that our insurers will be solvent when
required to make payments on claims. Furthermore, we cannot ensure that
insurance will remain available, or if available, that it will not be
prohibitively expensive. The loss of insurance coverage could have a material
adverse effect on our results of operations and financial condition.
EXERCISE MACHINE RECALLS. On July 14, 1997, in cooperation with the
Consumer Products Safety Commission, we recalled approximately 78,000 exercise
machines sold under the brand name, ProForm R-930 Spacesaver Riders, Model No.
PFCR6406. The machine was designed to close horizontally for easy storage. In
several reported incidents, when the handle bar was pulled against the seat
during use, the machine unexpectedly closed into the storage position. As such,
consumers were advised to stop using the machine until a free repair kit had
been installed. Any claims filed by a consumer in conjunction with this product
have been and continue to be handled in the normal course of business. To date,
we have not suffered any material adverse effect relative to this product
recall, but we cannot ensure that we will not suffer such material adverse
effect.
On April 15, 1999, in cooperation with the Consumer Products Safety
Commission, we recalled approximately 75,000 exercise machines sold under the
brand names, Weider Shapeglider (Model No. WECR4306), Weider PowerGlide (Model
No. WECR4406), and the Weslo Total Body Trainer (Model
13
<PAGE>
No. WLCR4356). In several reported incidents, the link arm supporting the seat
on these exercise gliders disconnected during use, causing the user to fall
abruptly. As such, consumers were advised to stop using the machine until a free
repair kit had been installed. Any claims filed by a consumer in conjunction
with this product have been and will continue to be handled in the normal course
of business. Some consumers have asserted punitive damages which may not be
covered by insurance. While we do not believe that we will incur any material
adverse effect relative to this product recall, we cannot ensure that we will
not suffer such material adverse effect.
OUR STRATEGY OF OPERATING RETAIL STORES HAS RESULTED IN NET LOSSES AND MAY NEVER
BECOME PROFITABLE.
We currently operate 72 retail store and kiosk locations where we offer
equipment directly to consumers. Our retail store strategy has resulted in net
losses and a negative cash flow to our company since we acquired our stores in
connection with the HealthRider and NordicTrack acquisitions. In addition, our
retail store strategy of selling goods directly to the consumer may be viewed
negatively by our traditional retail customers as a competitive effort against
them, causing them to reduce or cease the purchase of our products.
OUR DIRECT SALES TO CONSUMERS OVER THE INTERNET MAY BE VIEWED AS COMPETITIVE BY
OUR RETAIL CUSTOMERS.
We currently conduct business directly with the consumer through eight Web
sites over the Internet. We expect to continue and expand our sales efforts via
the Internet. Our expansion strategy over the Internet may not, however, be
successful, and our traditional retail customers may view this strategy as a
competitive effort against them causing them to reduce or cease the purchase of
our products.
WE ARE BEING AUDITED BY THE INTERNAL REVENUE SERVICE, WHICH COULD RESULT IN A
POTENTIAL TAX LIABILITY AND A SUBSTANTIAL REDUCTION IN OUR NET OPERATING LOSS
CARRYFORWARDS.
We are under examination by the Internal Revenue Service for our taxable
year ended May 31, 1996. This examination remains in process and has not been
completed. Because we carried forward losses claimed on our 1995 tax return to
our 1996 return and carried back losses claimed on our 1997 return to our 1996
return, the IRS, as part of its examination, is reviewing our tax returns for
our years ended May 31, 1995 and 1997. In connection with this review, the IRS
has given us preliminary written notice of its intention to disallow
approximately $26 million of option-related deductions claimed in our taxable
year ended May 31, 1995. Although our taxable year ended May 31, 1995 is closed
due to the statute of limitations, such disallowances (if successful) would
affect the amount of our net operating loss carryforwards. We intend to
vigorously and aggressively defend our position on this issue and believe that
we will prevail. The IRS has also indicated that it intends to challenge the
timing of other deductions in our taxable year ended May 31, 1997. If the IRS
were to prevail in respect of both these issues, due to the interplay of our net
operating loss carryforwards and carrybacks from other years, there would be a
potential tax liability for the taxable year ended May 31, 1996 in an amount,
through February 29, 2000, of approximately $4.2 million, including interest. In
addition, there would be a substantial reduction in our net operating loss
carryforwards. The IRS has also inquired about our treatment of a substantial
amount of banking, professional and other fees incurred in our taxable year
ended May 31, 1995. We are deducting the amount of those fees over the terms of
the debt that we incurred in that year. The IRS has just recently preliminarily
indicated that it intends to disallow the deduction of such fees and has asked
us to respond with our position. We have indicated that we believe that a
substantial majority of such fees are properly amortizable over the terms of the
debt we incurred in 1995 and are in the process of discussing with the IRS the
merits of its preliminary position. We cannot ensure that the IRS will not raise
other issues in the course of its examination.
If the IRS were to prevail in its position that the 1995 option-related and
the 1997 deductions should be disallowed, as noted above, our available net
operating loss carryforwards would be
14
<PAGE>
substantially reduced and there would be a potential liability for the year
ended May 1996 of approximately $4.2 million (including interest calculated
through February 29, 2000). Based on information currently available to us, we
do not believe that the reduction in our net operating losses should materially
adversely affect our financial condition. However, a reduction in our available
net operating losses could materially adversely affect our financial condition
if the IRS were successfully to assert other issues (including the deductibility
of our 1995 banking, professional and other fees) on audit or if it were to be
determined that we recognized additional cancellation of indebtedness income
upon the exchange of the 13% notes for the old notes as a result of the old
notes being determined to have been issued with original issue discount, or OID.
As discussed more fully under "Material United States Federal Income Tax
Consequences," it is our belief that the old notes were not issued with OID and
that, therefore, we did not recognize such additional cancellation of
indebtedness income.
WE ARE SUBJECT TO POTENTIALLY COSTLY ENVIRONMENTAL REGULATION.
Our operations are subject to federal, state and local environmental and
health and safety laws and regulations that impose workplace standards and
limitations on the discharge of pollutants into the environment and establish
standards for the handling, generation, emission, release, discharge, treatment,
storage and disposal of materials, substances and wastes. The nature of our
operations exposes us to the risk of claims with respect to environmental
matters and there can be no assurance that material costs or liabilities will
not be incurred in connection with such claims. We believe that the cost of
achieving and maintaining compliance with such laws and regulations will not
have a material adverse effect on our business or financial position. However,
future events, such as changes in existing laws and regulations or enforcement
policies or the discovery of contamination on sites operated by us, may give
rise to additional compliance costs or operational interruptions which could
have a material adverse effect on our results of operations or financial
condition.
THE EXCHANGE NOTES MAY BE CONSIDERED TO HAVE BEEN ISSUED WITH OID.
The exchange notes will be considered to have been issued with OID if the
old notes for which the exchange notes are exchanged were issued with OID. The
old notes will be considered to have been issued with OID if either the 13%
notes or a substantial amount of the old notes were "traded on an established
market," within the meaning of the Code and applicable Treasury regulations, at
any time during the sixty-day period that ended thirty days after the 13% notes
were exchanged for the old notes, and the fair market value of the 13% notes or
of the old notes, as the case may be, were determined to be below the face
amount of such notes. The applicable Treasury regulations are complex and highly
detailed in defining "traded on an established market." For example, the fact
that 13% notes or old notes were purchased and sold during the relevant period
would not, by itself, constitute trading on an established market. Rather, the
notes must be listed on an exchange, appear on a "quotation medium," or satisfy
other requirements. It is our belief, and we intend to take the position, that
neither the 13% notes nor a substantial amount of the old notes were "traded on
an established market" within the meaning of the relevant Code provisions and
Treasury regulations during the relevant time period. We, and our agents, have
undertaken a limited amount of investigation regarding whether the notes were so
traded and it is possible that the IRS may disagree with our conclusion. Because
the determination of whether the exchange notes will be considered to have been
issued with OID depends on the existence of such trading, an issue that is
factual in nature, we have not sought and will not seek an opinion of counsel
with respect to whether the exchange notes will be considered to have been
issued with OID. If the IRS were to assert successfully that the exchange notes
were issued with OID, special OID rules would apply to holders of exchange notes
or old notes. Under these special OID rules, you would have to accrue income on
the exchange notes before you would receive the cash that corresponds to that
income.
15
<PAGE>
Also, if the old notes are considered to have been issued with OID, we could
be treated as having recognized additional cancellation of indebtedness income
as of the date that the 13% notes were exchanged for the old notes. If such
additional income were recognized, substantially all of any such additional
income would be offset by available net operating loss carryforwards unless, as
discussed in "Risk Factors", above, such net operating loss carryforwards were
reduced as a result of the IRS, in connection with its audit of us, successfully
disallowing deductions previously claimed by us.
If the old notes were determined to have been issued with OID, all or a
portion of this income would be excluded from our income to the extent of our
insolvency prior to the issuance of old notes for 13% notes. It is possible that
we would have to reduce our tax basis in our assets as a result of this income.
This could materially adversely affect our financial condition because, if we
subsequently sold assets, we would recognize more taxable gain than we would
have absent this reduction in tax basis.
For a more complete discussion, see "Material United States Federal Income
Tax Consequences."
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<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes as described in this prospectus. We will receive in exchange old notes in
like principal amount. The old notes surrendered in exchange for the exchange
notes will be retired and canceled and cannot be reissued. Accordingly, the
issuance of the exchange notes will not result in any change in our
indebtedness.
We issued the old notes in connection with our September recapitalization in
exchange for our then outstanding 13% notes. We did not receive any cash
proceeds from the issuance of the old notes.
CAPITALIZATION
The following table sets forth, as of February 26, 2000, the consolidated
capitalization of our company:
<TABLE>
<CAPTION>
FEBRUARY 26, 2000
-----------------
(IN MILLIONS)
<S> <C>
Long-term debt (including current portion of $8,441):
Revolving credit facility................................. $ 61.8
Term loans................................................ 178.7
12% Subordinated Notes.................................... 44.3
Other..................................................... 8.0
-------
Total long-term debt...................................... 292.8
=======
Stockholder's equity (deficit):
Common stock and additional paid-in capital............... 204.1
Receivable from Parent.................................... (2.2)
Accumulated other comprehensive loss...................... (1.4)
Accumulated deficit....................................... (212.8)
-------
Total stockholder's equity (deficit)...................... (12.3)
-------
Total capitalization.................................... $ 280.5
=======
</TABLE>
17
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data for the year ended May 31,
1999 and the nine months ended February 26, 2000 have been derived by the
application of pro forma adjustments to the historical financial data.
The following pro forma financial data show the effect of the following
(dollar amounts in thousands): (1) the exchange of the outstanding 13% Notes for
new 12% Notes, cash and warrants of HF Holdings, (2) the initial borrowings
under the New Credit Facilities, (3) the repayment of the existing Credit
Agreement facility, (4) the issuance of senior management equity and the making
of loans under the senior management non-recourse notes and the junior
management notes, (5) the payment of fees and expenses related to the September
recapitalization and (6) the capital contribution from HF Holdings. These
unaudited pro forma financial statements should be read in conjunction with the
historical financial statements and notes thereto included elsewhere in this
prospectus.
The pro forma financial data do not purport to represent what our company's
results of operations would have actually been had the September
recapitalization in fact occurred on such dates, or to project results of
operations for any future period. The unaudited pro forma financial data is
based on assumptions that we believe are reasonable and should be read in
conjunction with the interim financial statements and the consolidated financial
statements and notes accompanying them that are included elsewhere in, or
annexed to, this prospectus.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
NINE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 26, 2000 ADJUSTMENTS FEBRUARY 26, 2000
------------------ ----------- ------------------
<S> <C> <C> <C>
Net sales...................... $ 570,843 $ 570,843
Cost of goods sold............. 414,576 414,576
Operating expenses............. 122,533 $ 81 C 122,614
--------- ------ ---------
Income from operations....... 33,734 (81) 33,653
Interest expense and
amortization of deferred
financing fees............... (27,464) 4,002 A (23,462)
--------- ------ ---------
Income before income taxes
and extraordinary item....... 6,270 3,921 10,191
Provision for income taxes..... 7,365 1,528 E 8,893
--------- ------ ---------
Income (loss) before
extraordinary item........... (1,095) 2,393 1,298
Extraordinary loss on
extinguishment of debt....... (1,755) 1,755 --
--------- ------ ---------
Net loss..................... $ (2,850) $4,148 $ 1,298
========= ====== =========
</TABLE>
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<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL YEAR PRO FORMA YEAR
ENDED MAY 31, ENDED MAY 31,
1999 ADJUSTMENTS 1999
--------------- ----------- --------------
<S> <C> <C> <C>
Net sales............................. $ 710,249 $ 710,249
Cost of goods sold.................... 514,018 514,018
Operating expenses.................... 168,750 $ 108 C 169,358
500 D
--------- ------ ---------
Income from operations.............. 27,481 (608) 26,873
Interest expense and amortization of
deferred financing fees............. (40,048) 3,506 B (36,542)
Other expense......................... (34) (34)
--------- ------ ---------
Loss before income taxes............ (12,601) 2,898 (9,703)
Provision for income taxes............ 12,084 1,130 E 13,214
--------- ------ ---------
Net loss............................ $ (24,685) $1,768 $ (22,917)
========= ====== =========
</TABLE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
A. Net adjustment for the elimination of historical interest expense and
amortization of deferred financing fees of $27,464 and recognition of
interest expense and amortization of deferred financing fees of $23,462 on
the new debt incurred in connection with the Exchange Offer.
B. Net adjustment for the elimination of historical interest expense and
amortization of deferred financing fees of $40,048 and recognition of
interest expense and amortization of deferred financing fees of $36,542 on
the new debt incurred in connection with the Exchange Offer.
C. Reflects the incremental amount of salaries of senior management under their
new employment agreements as a result of the Exchange Offer.
D. Compensation for the $500 loan to junior management that is to be forgiven in
six months subject to continuing employment.
E. Reflects the estimated income tax provision resulting from the pro forma
adjustments.
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<PAGE>
SELECTED FINANCIAL DATA
(IN MILLIONS)
The selected financial data set forth below with respect to our statements
of operations for each of the three years in the period ended May 31, 1999 and
balance sheets at May 31, 1998 and 1999, have been derived from our financial
statements included elsewhere in this prospectus that have been audited by
PricewaterhouseCoopers LLP, independent accountants, as indicated in their
report included elsewhere in this prospectus. The statement of operations data
for the years ended May 31, 1995 and 1996, and the balance sheet data as of such
dates, have been derived from the financial statements audited by
PricewaterhouseCoopers LLP but not included in this Prospectus. The financial
data for the nine months ended February 27, 1999 and February 26, 2000 have been
derived from unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of the financial position and results of operations for
these periods. Operating results for the nine months ended February 26, 2000 are
not necessarily indicative of the results that may be expected for the entire
year ending May 31, 2000. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the notes related thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31, FOR THE NINE MONTHS ENDED
------------------------------------------------------------- ------------------------------
FEBRUARY 27, FEBRUARY 26,
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- ------------ ------------
(1) (2) (3)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales................... $530.8 $747.6 $836.2 $749.3 $710.2 $558.2 $570.8
Cost of sales............... 378.4 541.5 597.8 536.0 514.0 401.8 414.6
------ ------ ------ ------ ------ ------ ------
Gross profit................ 152.4 206.1 238.4 213.3 196.2 156.4 156.2
Operating Expenses:
Selling................... 68.7 93.9 132.4 120.7 107.6 78.5 70.5
Research and
development............. 5.2 6.8 7.6 7.8 7.7 5.6 6.0
General and
administrative.......... 31.1 47.8 56.7 60.9 53.4 39.9 46.0
------ ------ ------ ------ ------ ------ ------
Weider Settlement &
HealthRider
integration............. -- -- 21.5 -- -- -- --
Compensation expense
attributable to
options................. 39.0 2.8 -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total operating expenses.... 144.0 151.3 218.2 189.4 168.7 124.0 122.5
------ ------ ------ ------ ------ ------ ------
Income from operations...... 8.4 54.8 20.2 23.9 27.5 32.4 33.7
Interest expense............ (17.3) (27.9) (33.6) (35.0) (33.0) (24.6) (25.6)
Amortization of deferred
financing fees............ (1.2) (2.5) (2.5) (4.3) (7.0) (4.5) (1.9)
------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes and extraordinary
item...................... (10.1) 24.4 (15.9) (15.4) (12.5) 3.3 6.2
Provision for (benefit from)
income taxes.............. (3.6) 10.8 (4.0) (5.9) 12.1 1.1 7.3
------ ------ ------ ------ ------ ------ ------
Income (loss) before
extraordinary item........ (6.5) 13.6 (11.9) (9.5) (24.6) 2.2 (1.1)
Extraordinary loss on
extinguishment of debt.... -- -- -- -- -- -- (1.8)
------ ------ ------ ------ ------ ------ ------
Net income (loss)........... $ (6.5) $ 13.6 $(11.9) $ (9.5) $(24.6) $ 2.2 $ (2.9)
====== ====== ====== ====== ====== ====== ======
OTHER DATA:
Depreciation and
amortization.............. $ 6.9 $ 7.2 $ 13.4 $ 16.7 $ 17.4 $ 13.2 $ 12.1
Capital expenditures........ 8.0 15.4 16.0 11.8 11.6 9.1 10.1
BALANCE SHEET DATA (AT THE END
OF THE PERIOD):
Cash........................ 4.1 19.3 5.6 3.9 4.3 9.7
Working capital............. 137.7 157.3 220.1 152.9 108.0 177.7
Total assets................ 281.9 306.5 456.9 363.1 331.9 414.5
Total indebtedness.......... 207.8 213.6 327.0 274.5 260.6 292.8
Stockholder's equity
(deficit)................. (14.8) 2.0 (10.7) (20.3) (47.8) (12.3)
</TABLE>
------------------------------
(1) In fiscal 1995, a $39.0 million compensation expense was incurred with
respect to management stock options.
(2) In fiscal 1996, a $2.8 million compensation expense was incurred with
respect to management stock options
(3) In fiscal 1997, the Company incurred a $14.0 million step-up in value of
HealthRider inventory purchased. This item was a non-cash expense and was
required for purchase accounting per GAAP. The Company also incurred Weider
settlement expenses of $16.6 million related to the settlement of various
disputes. This cash expense item includes one-time payments to various
Weider affiliates as well as associated legal expenses and professional
fees. The Company also incurred HealthRider integration costs of $4.9
million.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the historical audited
financial statements and the related notes thereto appearing elsewhere in this
report. Our fiscal year ends on May 31 of the corresponding calendar year. For
example, fiscal 1999 ended on May 31, 1999. "EBITDA" is defined herein as income
before provisions for (benefit from) income taxes, depreciation, amortization
and interest expense. EBITDA as presented may not be comparable to similarly
titled measures by other companies due to differences in the computations.
EBITDA is presented because we believe it is frequently used by security
analysts in the evaluation of companies. However, EBITDA should not be
considered as an alternative to net income as a measure of operating results or
to cash flows as a measure of liquidity in accordance with generally accepted
accounting principles.
RECENT DEVELOPMENTS
During the year ended May 31, 1999 we incurred significant net losses, and
as of May 31, 1999 had significant accumulated deficits. We also experienced a
decline in our revenue base and were unable to service our debt obligations. In
that regard, we were unable to make the interest payment on the 13% notes due on
July 15, 1999 and were in violation of the following financial covenants of our
credit agreement:
- minimum adjusted net worth
- minimum interest coverage ratio
- minimum debt service ratio
- maximum funded debt to adjusted net worth
To provide ongoing funding for our operations and debt repayment
requirements, on September 27, 1999, we consummated a troubled debt
restructuring of our capital structure that included an approximately
$40 million equity investment in our company. The principal equity investors
included affiliates of Bain Capital and its designees, members of our management
and Credit Suisse First Boston and its affiliates. Our September
recapitalization also included a refinancing of our existing bank credit
facility.
Prior to the September recapitalization, we were a wholly owned subsidiary
of IHF Holdings, Inc. ("IHF Holdings"), which was, in turn, a wholly owned
subsidiary of ICON Fitness Corporation ("ICON Fitness"). As part of the
September recapitalization, we closed a private exchange offer and consent
solicitation in which:
(1) participating holders of our then outstanding 13% Senior Subordinated
Notes due 2002 received the following consideration for each $1,000
principal amount of 13% notes held:
- $395 in cash,
- $444 principal amount of 12% notes,
- an additional cash payment equal to the sum of (i) interest due on the
tendered 13% notes on July 15, 1999 (with additional interest thereon
from July 15, 1999 to the closing of the exchange offers at the rate of
17% per annum) and (ii) interest accrued after July 15, 1999 on the
tendered 13% notes to the closing of the exchange offers at the rate of
17% per annum, and
- warrants to purchase 4.25 shares of common stock of our new parent
company, HF Holdings, Inc. ("HF Holdings") at an exercise price of
$.001 per share.
21
<PAGE>
(2) participating holders of 15% Senior Secured Discount Notes due 2004 of
IHF Holdings received the following consideration for each $1,000
principal amount at maturity held:
- warrants to purchase 5.26 shares of HF Holdings common stock at an
exercise price of $.001 per share.
(3) participating holders of 14% Senior Discount Notes due 2006 of ICON
Fitness received the following consideration for each $1,000 principal
amount at maturity held:
- warrants to purchase 1.24 shares of HF Holdings common stock at an
exercise price of $.001 per share.
Prior to the September recapitalization there were issued and outstanding
$101,250,000 principal amount of our 13% notes, $123,700,000 principal amount at
maturity of 15% notes of IHF Holdings and $162,000,000 principal amount at
maturity of 14% notes of ICON Fitness. All but $1.5 million principal amount of
our 13% notes and $7.0 million principal amount at maturity of 14% notes of ICON
Fitness were tendered and accepted for exchange in the September exchange
offers. Those untendered notes remain outstanding under amended indentures.
In connection with the September recapitalization, we became a wholly owned
Subsidiary of HF Holdings, Inc.
RESULTS OF OPERATIONS
OPERATING RESULTS FOR THE NINE MONTHS ENDED FEBRUARY 26, 2000 AND FEBRUARY 27,
1999
During the first nine months of fiscal 2000, net sales increased $12.6
million, or 2.2%, to $570.8 million from $558.2 million in the first nine months
of fiscal 1999. Domestic treadmill sales for the first nine months of fiscal
2000 accounted for approximately 61.0% of total net sales, versus 60.1% in the
first nine months of fiscal 1999. For the first nine months of fiscal 2000,
domestic treadmill sales were $348.4 million compared to $336.4 million for the
same period a year ago, which represents a $12.0 million increase. Other sales
increases include trampolines ($8.2 million), benches ($2.6 million), and gyms
and systems ($1.8 million). International sales increased $2.4 million. Sales of
light exercise equipment decreased $10.8 million and miscellaneous and other
products including steppers, cardios and airwalkers decreased $4.4 million
during the first nine months of fiscal 2000 compared to the first nine months of
fiscal 1999.
Gross profit for the first nine months of fiscal 2000 was $156.3 million, or
27.4% of net sales, compared to $156.4 million, or 28% of net sales for the
first nine months of fiscal 1999. The decrease of 0.6% in profit margin was
attributable to the changes in product mix.
Selling expenses totaled $70.5 million, or 12.4% of net sales, in the first
nine months of fiscal 2000, compared to $78.5 million, or 14.1% of net sales for
the first nine months of fiscal 1999. This decrease, both in dollars and as a
percentage of sales, is attributable primarily to a reduction in advertising
expenses that have decreased by approximately $5.4 million for the first nine
months of fiscal 2000, versus the first nine months of fiscal 1999. Other
selling expense decreases include reductions in bad debt expense of $2.9
million, salaries and wages of approximately $0.7 million, and contract labor
and supplies and other related expenses of approximately $1.0 million.
Commissions and freight out increased for the first nine months of fiscal 2000
over fiscal 1999 by approximately $0.7 million or 5.5%, due mainly to increased
sales.
Research and development expenses totaled $6.0 million, or 1.0% of net
sales, for the first nine months of fiscal 2000, compared to $5.6 million, or
1.0% of net sales for the first nine months of fiscal 1999. This $0.4 million
increase is due to continued efforts to develop both current and future
products.
22
<PAGE>
General and administrative expenses totaled $46.0 million, or 8.1% of net
sales, for the first nine months of fiscal 2000, compared to $40.0 million, or
7.2% of net sales for the first nine months of fiscal 1999. This increase of
approximately $6.0 million in general and administrative expenses for the first
nine months of fiscal 2000, was attributable to increases in overhead of $4.2
million, equity grant to senior management of $3.2 million, supplies of
approximately $0.6 million, and aggregate other expenses of approximately $2.9
million. These increased expenses were offset by a decrease in salaries and
wages of $4.3 million and depreciation and amortization expense of $0.6 million.
As a result of the foregoing factors, operating income was $33.7 million in
the first nine months of fiscal 2000, compared to operating income of $32.4
million in the first nine months of fiscal 1999.
Interest expense was $25.6 million for the first nine months of fiscal 2000,
compared to $24.6 million for the first nine months of fiscal 1999. The increase
in interest expense was due to a higher level of outstanding indebtedness in
fiscal 2000.
Income tax expense was $6.2 million for the first nine months of fiscal
2000, compared with an income tax expense of $1.1 million for the first nine
months of fiscal 1999. The increase in tax expense for the first nine months of
fiscal 2000, compared to the first nine months of fiscal 1999, was a result of
no income tax losses incurred from June through September.
As a result of the foregoing factors, net loss was $2.9 million for the
first nine months of fiscal 2000, compared to net income in the first nine
months of fiscal 1999 of $2.2 million.
In connection with the September recapitalization, we recorded an
extraordinary charge of $1.8 million, net of income tax benefit of $1.1 million,
to write off unamortized loan fees from our previous bank credit facility.
YEAR ENDED MAY 31, 1999 COMPARED TO THE YEAR ENDED MAY 31, 1998
Net sales decreased by $39.1 million, or 5.2%, from $749.3 million in fiscal
1998 to $710.2 million in fiscal 1999. The decrease in sales was primarily
attributable to airwalker sales, ab shaper sales and cardio sales which
decreased by $10.9 million, $3.4 million and $5.0 million, respectively. Also,
elliptical sales decreased by $3.8 million, stepper sales decreased by
$0.5 million and sales in Europe decreased by approximately $2.5 million. These
decreases were offset by increased bike sales of $10.9 million, increased home
spa sales of $2.5 million and relaxation chair sales of $2.0 million. Trampoline
sales also increased $3.8 million over the last fiscal year. Other product
sales, including soft goods, increased by approximately $11.7 million. Treadmill
sales decreased from $474.0 million in fiscal 1998 to $437.0 million in fiscal
1999. Treadmill sales accounted for approximately 63.3% of net sales in fiscal
1998 and 61.5% of net sales in fiscal 1999. The decrease in sales was primarily
attributable to inventory reduction by a group of key customers which either
changed their inventory policies, suffered severe financial difficulty or ceased
sales of these products.
Gross profit for fiscal 1999 was $196.2 million, or 27.6% of net sales. In
fiscal 1998, gross profit was 28.5% of net sales at $213.6 million, excluding a
non-recurring cost of $0.3 million.
Selling expenses were $107.6 million, or 15.2% of net sales, in fiscal 1999
compared to $120.8 million, or 16.1% of net sales, in fiscal 1998. The dollar
decline was partly offset by the write-off of the Service Merchandise account
receivable for $10.5 million which filed for bankruptcy in fiscal 1999. In
addition, advertising expense in fiscal 1999 decreased by $13.4 million and
salaries and wages decreased by $3.1 million primarily as a result of cost
reduction strategies.
Research and development expense was $7.7 million, or 1.1% of net sales, for
fiscal 1999 compared to $7.8 million, or 1.0% of net sales, for fiscal 1998.
This expense reflects our continued efforts to develop both current and future
products.
23
<PAGE>
General and administrative expense totaled $53.4 million, or 7.5% of net
sales, for fiscal 1999 compared to $60.9 million, or 8.1% of net sales, for
fiscal 1998. The decrease was primarily a result of cost reduction strategies.
Depreciation increased during fiscal 1999 by $1.4 million over the same period
during the prior year due to recent acquisitions. Legal expenses and insurance
expenses decreased approximately $1.6 million and $1.7 million, respectively, in
fiscal 1999 over fiscal 1998. Capital expenditures totaled $11.6 million in
fiscal 1999, down $0.2 million from fiscal 1998.
As a result of the foregoing factors, EBITDA was $45.3 million, or 6.4% of
net sales, in fiscal 1999, compared to $41.1 million, or 5.5% of net sales, in
fiscal 1998. Adjusted for non-recurring costs of $10.5 million, EBITDA in fiscal
1999 totaled $55.8 million, or 7.9% of net sales, compared to $41.4 million, or
5.5% of net sales, in fiscal 1998.
Interest expense, including amortization of deferred financing fees
increased to $40.3 million for our company in fiscal 1999 compared to $39.9.
million in fiscal 1998. The increase in interest expense and amortization of
deferred financing fees in fiscal 1999 was the result of additional levels of
borrowing under our old credit agreement and accretion of the principal balances
of our then outstanding indentures. This interest expense is not representative
due to our September recapitalization.
Our effective tax rate for fiscal 1999 was an expense of 96% for our
company, compared to a benefit of 38% in fiscal 1998. The higher effective rate
for fiscal 1999 reflects our provision for a valuation allowance for a portion
of our deferred tax assets that will not be realized due to our September
recapitalization. The deferred tax assets that make up the valuation allowance
are primarily related to net operating loss carryforwards ("NOL's"), future
deductible interest and stock compensation expense.
As a result of the foregoing factors, our net loss was $24.7 million for
fiscal 1999, compared to a net loss of $9.5 million for the same period in
fiscal 1998.
YEAR ENDED MAY 31, 1998 COMPARED TO THE YEAR ENDED MAY 31, 1997
Net sales decreased by $86.9 million, or 10.4% from $836.2 million in fiscal
1997 to $749.3 million in fiscal 1998. The decrease in sales was primarily
attributable to decreased consumer preference for upright rower sales and ab
shaper sales which decreased by $77.8 million and by $41.2 million,
respectively. Also, airwalker sales decreased by $16.5 million, rower/skier
sales decreased by $5.2 million and sales in Europe decreased by approximately
$4.9 million. These decreases were partly offset by increased treadmill sales of
$21.1 million, increased bike sales of $13.3 million, a new elliptical product
introduced in fiscal 1998 which accounted for $21.8 million in new sales and
other various product sales including softgoods which increased by approximately
$2.5 million. Treadmill sales increased from $452.9 million in 1997 to
$474.0 million in fiscal 1998. Treadmill sales accounted for approximately 54.2%
of net sales in 1997 and 63.3% of net sales in fiscal 1998.
Gross profit for fiscal 1998 was $213.3 million, or 28.5% of net sales. In
fiscal 1997 gross profit was also 28.5% of net sales at $238.4 million.
Selling expenses were $120.8 million, or 16.1% of net sales, in fiscal 1998
compared to $132.4 million, or 15.8% of net sales, in fiscal 1997. The dollar
decline was attributed to a decrease in direct response and other advertising of
$6.0 million as well as a one time charge of $6.4 million related to the
HealthRider acquisition in fiscal 1997. In addition, commissions expense
decreased by $0.9 million during fiscal 1998. These decreases were offset by an
increase in bad debt expense of $1.4 million primarily due to a company that
filed for bankruptcy in fiscal 1998 and other various increases of approximately
$0.3 million.
24
<PAGE>
Research and development expense was $7.8 million, or 1.0% of net sales, for
fiscal 1998 compared to $7.6 million, or 0.9% of net sales, for fiscal 1997.
This increase was due to continued efforts to develop both current and future
products.
General and administrative expense totaled $60.9 million, or 8.1% of net
sales, for fiscal 1998 compared to $56.7 million, or 6.8% of net sales, for
fiscal 1997. The largest single increase in fiscal 1998 over 1997 was
depreciation expense of $3.1 million, which increased due to the recent
acquisition of assets from HealthRider and CanCo. Product liability insurance
claims increased $1.4 million during fiscal 1998 due to a concerted effort by
the legal department to settle outstanding claims. Also, legal expense and rent
expense increased approximately $1.1 million and $0.9 million, respectively, in
fiscal 1998 over fiscal 1997. These increases were offset by decreases in the
salaries and bonus expenses of $2.3 million in fiscal 1998 compared to fiscal
1997. Capital Expenditures totaled $11.8 million in fiscal 1998, compared to
$11.1 million in fiscal 1997.
In the second quarter of fiscal 1997, our company and Weider Health and
Fitness ("WHF") and its affiliates settled litigation through a number of
agreements. The settlement included the release of claims previously asserted by
WHF and its affiliates, amendments to agreements existing between our company
and WHF and its affiliates and new agreements among our company and WHF and its
affiliates. Expenses related to the WHF settlement amounted to $16.6 million for
fiscal 1997. There were no expenses related to this settlement in fiscal 1998.
HealthRider integration costs totaled $4.9 million for fiscal 1997. These
charges were incurred to eliminate the duplication in staff and facilities with
those of our company. There were no charges related to HealthRider integration
during fiscal 1998.
As a result of the foregoing factors, EBITDA was 41.1 million, or 5.5% of
net sales, in fiscal 1998, compared to $34.3, or 4.1% of net sales, in fiscal
1997. EBITDA for fiscal 1998 included an adjustment of $0.3 million relating to
acquisition costs.
Interest expense, including amortization of deferred financing fees
increased to $39.9 million for our company, in fiscal 1998 compared to
$36.7 million in fiscal 1997. The increase in interest expense and amortization
of deferred financing fees in fiscal 1998 was the result of additional levels of
borrowing under our credit agreement and accretion of the principal balances of
our outstanding indentures.
The income tax benefit was $5.9 million for our company, for fiscal 1998,
compared with a tax benefit of $4.0 million during fiscal 1997. This is a result
of the loss before income tax for fiscal 1998 and fiscal 1997. At the end of
fiscal 1998, we had a net deferred tax asset of $16.1 million. No valuation
allowance was recorded against this asset because we believe that we will
generate sufficient future taxable income through operations to realize the net
deferred assets prior to expiration of any net operating losses (NOL). NOL's can
be carried forward up to 20 taxable years. There can be no assurance however,
that we will generate any specific level of earnings or that it will be able to
realize any of the deferred tax asset in future periods. If we are unable to
generate sufficient taxable income in the future through operating results, a
valuation allowance against this deferred tax asset would result in a charge to
earnings. See "Risk Factors--We are being audited by the Internal Revenue
Service."
As a result of the foregoing factors, our net loss was $9.5 million, for
fiscal 1998, compared to net loss of $12.0 million for fiscal 1997.
Advertising allowances due to retail customers totaled $2.5 million at
May 31, 1998. Advertising allowances are generally a fixed percentage of sales
to customers. Fluctuations in the balance of this allowance are attributable to
changes in customer sales mix and the timing of when allowances are taken.
25
<PAGE>
SEASONALITY
The following are the net sales and operating income of our company by
quarter for the fiscal years 2000, 1999 and 1998:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales
2000........................................ $ 99.5 $234.8 $236.5 $ --
1999........................................ 117.2 214.3 226.7 152.0
1998........................................ 127.5 236.3 252.0 133.5
Operating Income
(Loss)
2000........................................ $ (6.4) $ 19.3 $ 20.8 $ --
1999........................................ (3.4) 19.7 16.0 (4.8)
1998........................................ (7.6) 15.7 21.5 (5.7)
Net Income (Loss)
2000........................................ $(11.7) $ 1.6 $ 7.3 $ --
1999........................................ (13.3) 0.9 (1.6) (10.6)
1998........................................ (10.9) 3.8 6.7 (9.1)
</TABLE>
We sell a majority of our products to customers in our second and third
fiscal quarters (i.e., from September through February). Increased sales and
distribution typically occur in the Christmas retail season and the beginning of
a new calendar year because of increased promotions by customers, increased
consumer purchases and seasonal changes that prompt people to exercise inside.
If actual sales for a quarter do not meet or exceed projected sales for that
quarter, expenditures and inventory levels could be disproportionately high for
such quarter and our cash flow for that quarter and future quarters could be
adversely affected. The timing of large orders from customers and the mix of
products sold may also contribute to periodic fluctuations. While seasonality
has been the trend, it may not be indicative of the results to be expected for
this fiscal year or for any future years.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended February 26, 2000, we used $44.1 million of cash
in operating activities, compared to $32.4 million for the nine months ended
February 27, 1999. The majority of the cash used in operating activities is a
result of increases in accounts receivable and inventory, which are normal
seasonal fluctuations. We used $13.0 million in investing activities for the
nine months ended February 26, 2000 due primarily to the purchase of upgrades in
plant and tooling and purchases of other equipment. We also had $62.9 million of
cash provided by financing activities for the nine months ended February 26,
2000. As a result of the foregoing factors, we had a net increase in cash of
$5.4 million as of February 26, 2000. Management anticipates that its cash
balances, operating cash flows and available credit line will be adequate to
fund its anticipated capital commitments and working capital requirements for
the remainder of 2000.
In 1999, we were provided $38.0 million of cash from operating activities
compared to $47.6 in fiscal 1998. The majority of this cash provided by
operating activities is a result of a decrease in accounts receivable. We used
$20.1 million in investing activities for fiscal 1999 due primarily to the
purchase of NordicTrack for $8.5 million and $11.6 million of cash used for
capital expenditures related to upgrades in plant and tooling and purchases of
additional manufacturing equipment. Also, we used $17.1 million in financing
activities during 1999 as a result of a net reduction in long-term debt long
term debt. As a result of the foregoing factors, we had a net increase in cash
of $0.4 million from May 31, 1998 to May 31, 1999.
26
<PAGE>
In 1998, we were provided $47.6 million of cash from operating activities
compared to usage of cash in the amount of $37.7 million in 1997. The majority
of this cash provided by operating activities is a result of a decrease in
accounts receivable. We received $6.4 million from investing activities for
fiscal 1998 due to the sale of a building for $18.3 million, offset by
$11.8 million of cash used for capital expenditures related to upgrades in plant
and tooling and purchases of additional manufacturing equipment. Also, we used
$55.7 million for financing activities during 1998 to pay down lines of credit
and other long term debt. As a result of the foregoing factors, we had a net
decrease in cash of $1.7 million from May 31, 1997 to May 31, 1998.
In 1997, we used $37.7 million of cash in operating activities primarily as
a result of increases in accounts receivable. We used $16.0 million in cash for
capital expenditures related to upgrades in plant and tooling and purchases of
additional manufacturing equipment and building expansion and $6.3 million for
repayments of long term debt. We used $25.8 million in cash to acquire
HealthRider and $11.1 million to acquire Weider Sports and CanCo. In addition,
the effect of exchange rates decreased our cash balances at May 31, 1997 by
$1.0 million. During 1997, we had a net decrease in cash of $13.8 million.
We made capital expenditures of approximately $11.6 million during fiscal
1999 and expect to make capital expenditures of approximately $13.0 million in
2000. Such expenditures are primarily for expansion of physical plant, purchases
of additional or replacement manufacturing equipment and revisions and upgrades
in plant tooling. We also made research and development expenditures in 1999 of
approximately $7.7 million, and expect to make research and development
expenditures of approximately $8.4 million in 2000.
Our primary short-term liquidity needs consist of financing seasonal
merchandise inventory buildups and paying cash interest expense under our credit
facilities and on the 12% notes. Our principal source of financing for seasonal
merchandise inventory buildup and increased receivables is revolving credit
borrowings under the credit facilities. Our working capital borrowing needs are
typically at their lowest level in April through June, increase somewhat through
the summer and sharply increase from September through November to finance
accounts receivable and purchases of inventory in advance of the Christmas and
post-holiday selling season. Generally, in the period from November through
February, our working capital borrowings remain at their highest level and then
are paid down to their lowest annual levels by April.
The 12% notes issued in our September recapitalization are due
September 27, 2005 and are guaranteed by each of our domestic subsidiaries.
Interest is due each January 15 and July 15 of each year, beginning on
January 15, 2000. The 12% notes are redeemable at any time at a premium, as
described in this prospectus under the caption "Description of
Notes--Redemption". The 12% notes contain restrictive covenants that, among
other things, limit our and our subsidiaries' ability to incur additional debt,
pay dividends or make other distributions, make investments, dispose of assets,
issue capital stock of subsidiaries or enter into mergers or consolidations or
sell all or substantially all of our assets. See "Description of Notes."
In connection with our September recapitalization, we entered into new
credit facilities of $300 million with a syndicate of banks and financial
services companies. See "Description of Material Indebtedness"
Proceeds of the new credit facilities were used to refinance our existing
senior credit facilities and 13% notes and to fund transaction fees and
expenses, and will be used to provide for general working capital.
27
<PAGE>
As of February 26, 2000, the balance outstanding under the new credit
facilities consisted of (in thousands):
<TABLE>
<S> <C>
Revolver.................................................... $ 61,834
Term Loan A................................................. 29,318
Term Loan B................................................. 79,725
Term Loan C................................................. 55,397
IP Loan..................................................... 14,250
--------
$240,524
========
</TABLE>
We have a significant amount of indebtedness. As of February 26, 2000 our
consolidated indebtedness was approximately $292.8 million, of which $44.3
million was senior indebtedness.
The 12% notes and new credit facilities contain certain restrictive
covenants that, among other things, limit our ability to incur additional debt,
pay dividends or make other distributions, make investments, dispose of assets,
issue capital stock of subsidiaries or enter into mergers or consolidations or
sell all or substantially all of our assets.
Our ability to make payments on and to refinance our indebtedness will
depend on our ability to generate cash in the future. This, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. We will continue to manage within
our financial resources and attempt to balance our working capital needs with
cash flow generated from operations and available current financing to provide
for our short-term and long-term liquidity needs.
MARKET RISK
Although we cannot accurately predict the precise effect of inflation on our
operations, we do not believe that inflation has had a material effect on sales
or results of operations in recent years. We do import some finished products
and components from Canada and Asia. All purchases from Asia have been fixed in
U.S. dollars and, therefore, we have not been subject to foreign currency
fluctuations on such purchases, although our vendors may respond to foreign
currency fluctuations by seeking to raise their prices. Purchases of inventory
from Canada have been settled in Canadian dollars and therefore we have been
subject to fluctuations in the value of the Canadian dollar which could have an
impact on the our operating results. In connection with the importation of
products and components from Canada, our company from time to time engages in
hedging transactions by entering into forward contracts for the purchase of
Canadian dollars which are designed to protect against such fluctuations. Our
hedging transactions do not subject it to exchange rate risk because gains and
losses on these contracts offset losses and gains on the transaction being
hedged. The unhedged portion of purchases from Canada is not significant.
As of May 31, 1999 and 1998 we had approximately $0 million Canadian and
$32 million Canadian, respectively, of open forward exchange contracts to sell
Canadian dollars throughout fiscal years May 31, 2000 and 1999, respectively.
The fair value of these forward exchange contracts are based on quoted market
prices. At May 31, 1999 the estimated unrealized loss on outstanding forward
exchange contracts was $0 and at May 31, 1998 the estimated unrealized loss was
$459,000. During fiscal 1999 and 1998 we recognized losses of $34 and $449,000,
respectively, and in 1997 we recognized gains of $149,000 upon settlement of
foreign currency translations denominated in Canadian dollars.
YEAR 2000 COMPLIANCE
We utilize and are dependent upon data processing systems and software to
conduct our business. The data processing systems and software include those
developed and maintained by our third-party data processing vendors and software
which is run on in-house computer systems. We have reviewed and assessed all
hardware and software to confirm that it will function properly in the Year
2000.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet, and measure those instruments
at fair value. Statement of Financial Accounting Standards ("SFAS") No. 133 is
effective for all quarters of fiscal years beginning after June 15, 2000, and
prohibits retroactive application to financial statements of prior periods. We
currently intend to implement the provisions of SFAS No. 133 in the first
quarter of the fiscal 2001. We currently have limited involvement with
derivative instruments, primarily for purposes of hedging against fluctuations
in exchange rates. We cannot at this time reasonably estimate the potential
impact of this adoption on its financial position or results of operations for
future periods.
At the beginning of fiscal year 1999, we adopted SFAS No. 130 "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. In accordance with the
provisions of SFAS No. 130, we have presented the components of other
comprehensive income (loss) in its consolidated statements of operations and
comprehensive loss. The financial statements for all prior periods have been
restated to conform to requirements of SFAS No. 130.
In fiscal year 1999, we adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise", replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of our
reportable segments. The adoption of SFAS No. 131 did not affect our results of
operations or financial position.
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BUSINESS
GENERAL
We are one of the largest manufacturers and marketers of home fitness
equipment in the United States. Our focus is to address consumers' interest in a
healthy, active lifestyle with a broad range of high quality products at a
variety of price/value relationships specifically targeted to meet different
consumers' health and fitness needs. Our line of home fitness aerobic products
includes treadmills, elliptical cross-trainers, exercise bikes, stair steppers,
skiers and upright rowers and our line of anaerobic fitness products including
home gyms and weight benches. We also offer trampolines, recreational sports
products, sports medicine products and fitness accessories. We market the
majority of our products under the brand names NordicTrack, ProForm,
HealthRider, Image, Weider, and JumpKing. In addition, we manufacture a complete
line of premier home fitness equipment under the Reebok brand name, under a
licensing agreement.
MARKETING AND DISTRIBUTION
We market our products under multiple brands through multiple distribution
channels, including specialty dealers, sporting goods chains, department stores,
warehouse clubs, discount merchants, catalogue showrooms and direct marketing
through our own Internet sites, catalogs and retail stores. We believe the
marketing of our products through multiple distribution channels provides us
with several competitive advantages:
- greater growth and increased market access;
- the ability to maximize revenue throughout a product's life cycle by
repositioning products in different channels and under different brand
names as products mature;
- feedback on market trends and changing consumer tastes; and
- reduced dependence on any single channel of distribution.
To enhance our distribution strategy, we target our brands to specific
distribution channels. By marketing specific brands tailored to appeal to
different demographic groups, we are able to market products with varying
designs, features and price ranges and target these products to a wide variety
of consumers with different fitness needs and disposable incomes. We believe our
brand positioning strategy enables us to:
- achieve greater appeal to each market segment;
- promote price stability across our distribution channels; and
- provide high-quality products with the price ranges and features desired
by different demographic groups.
We manufacture and distribute a broad line of treadmill, aerobic exercise
machines and strength training equipment, and offer a range of technological
features, from manual equipment to sophisticated programmable electronic
products, at a variety of price points. We also market recreational sports
products, fitness accessories, spas and massage products. Our strategy of
offering a broad range of products enables us to:
- offer categories of fitness products that appeal to consumers with varying
fitness needs and disposable incomes;
- respond quickly to changes in consumer preferences and fitness trends;
- reduce our dependence on any single product category; and
- participate in growth opportunities across a wide variety of product
categories.
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AEROBIC PRODUCTS
We offer aerobic products, which are designed to promote cardiovascular
fitness, under the NordicTrack, ProForm, HealthRider, Image, Weslo and Reebok
brand names.
MOTORIZED TREADMILLS. We are the leading producer of motorized treadmills.
Motorized treadmills allow users to run at speeds of up to 12 mph. The features
offered by our motorized treadmills that enhance the home user's experience
include programmable speed and incline, electronic feedback on speed, elapsed
time, distance traveled and calories burned, and cross-training upper body
exercise functions. Other popular features on our treadmill line of products
include: CD Coach technology, which allows the user to listen to his/her
favorite music while a digital personal trainer motivates him/ her through a
programmable workout; cushioned belts for a quieter, more shock-absorbent
workout; the SpaceSaver feature for treadmills (introduced in 1996) which
enables a treadmill to fold vertically for easy storage; and the CrossWalk line
of treadmills, which provides users with upper body exercise for a total body
workout. The retail price points of the motorized treadmills range from $199 to
$2,499.
ELLIPTICALS. In the fall of 1997, we introduced our Elliptical Cross
Trainer. This category of aerobic products has been popular in clubs for the
last few years, and in the fall of 1997 we introduced the HealthRider brand of
Elliptical Cross Trainer. This product offers a low-impact, high-intensity
aerobic workout which harnesses the momentum of a natural striding motion, and
eliminates the impact of typical running or walking. An innovative mechanism
that we developed, which involves a tube within a tube that slides in and out of
a crank attached to a flywheel, links upper-body motion with the lower-body
motion for a synchronized rhythmic total-body workout. A four-window electronic
display provides feedback on speed (steps per minute), time, distance and
calories burned. The name "Elliptical" refers to the oval shape of the user's
footpath. Retail price points of our Ellipticals range from $199 to $999, and
are available in the NordicTrack, ProForm, HealthRider, Image, Reebok and Weslo
brands. Our ProForm brand elliptical was rated the number one elliptical in the
February 1999 Consumer Reports ranking of home exercise equipment.
EXERCISE BIKES. We offer exercise bikes featuring adjustable air resistance
or flywheel resistance (which are constructed to interact with the air to
provide resistance to movement), electronic monitors which display elapsed time,
speed, distance and calories burned, and dual or triple action design which
allows the user to exercise upper body, lower body or both simultaneously. Some
units add motivational electronics and programmable resistance which allow users
to design their own workouts. Some higher end units also contain an
electromagnetic drive mechanism, which creates resistance through the use of
electro-magnetic current, and which creates less noise and offers smoother
action. Retail price points of our exercise bikes range from $99 to $799 and are
available in the NordicTrack, ProForm, HealthRider, Image, Reebok and Welso
brands.
STAIR STEPPERS. Various stair stepper machines sold by our company offer
adjustable resistance, self-leveling pedals, motivational fitness monitors,
accessory stations to hold water bottles, books and towels, magnetic resistance
and total body conditioning, which combines upper and lower body workouts. Other
features offered by our stair steppers include the Speed Link adjustable
resistance system, multi-window electronic monitors and programmable
electronics. The Speed Link adjustable resistance system uses shocks attached to
the pedal leg of the stepper which are placed into one of several positions to
increase or decrease resistance. Retail price points for our stair steppers
range from $99 to $199.
UPRIGHT ROWERS. We introduced our Cardio family of upright rowers under the
Weslo brand in October 1994. The Cardio family of upright rowers exercises both
the arms and legs while providing both an aerobic and anaerobic workout through
variable resistance. Retail price points for the Welso brand range from $99 to
$199. In addition, the HealthRider brand upright rower is available at $299.
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ANAEROBIC PRODUCTS
Under the NordicTrack, HealthRider, Image, ProForm, Weslo, Weider and Reebok
brand names, we offer anaerobic products, which are designed to develop muscle
tone and strength.
HOME GYMS. Our home gyms range from traditional cast iron or vinyl plate
weight stack units to programmable electronic units. New products within this
category include home gyms which integrate aerobic functions and electronic
adjustability allowing simple adjustment in one pound increments with digital
feedback. Selected units are designed to allow multiple users to use the
equipment simultaneously, allowing circuit training. Our home gyms range in
retail price from $299 to $1,299.
WEIGHT BENCHES. We offer a range of weight benches to specialty fitness
dealers through the Image and ProForm brands and market a complete of weights
and benches under the Weider brand name. Retail price points of these products
range from $49 to $299.
FREE WEIGHTS. We offer a broad assortment of cast-iron weight plates, vinyl
and neoprene dipped weights and dumbbells. We are also innovating dumbbell grips
for improved comfort and use and addressing needs of women entering the strength
training category.
OTHER PRODUCTS
RECREATIONAL SPORTS PRODUCTS. Our JumpKing subsidiary manufactures and
markets a trampoline line that includes both mini-trampolines for indoor home
exercise use and full-sized trampolines for outdoor home recreational use. The
mini-trampoline retails at approximately $25; full-sized trampolines have retail
price points ranging from $199 to $399.
EXERCISE ACCESSORIES. We offer a limited line of back support belts and
workout gloves and have introduced a line of exercise accessories, including
ankle and hand weights, grip devices and aerobic exercise step decks. These
products are sold under the Weider, Reebok, HealthRider, ProForm and NordicTrack
brands.
RELAXATION PRODUCTS. Beginning in the spring of 1996, we introduced a line
of relaxation products such as acrylic and soft-sided hydrotherapy spas,
motorized massage chairs and massage pillows. These products are currently
distributed through various channels including department stores, mass
merchandisers, sporting goods, home-shopping, catalogs and our own direct
response efforts.
PRODUCT INNOVATION AND DEVELOPMENT
Product and design innovation has contributed significantly to our growth.
On an ongoing basis, we evaluate new product concepts and seek to respond to the
desires and needs of consumers by frequently introducing new products and
repositioning existing products. We have 222 full-time employees in the research
and development area, hold 178 patents and have 38 patent applications pending.
We also hold 96 trademarks registered in the United States and 404 trademarks
registered in foreign countries. We have pending 25 trademarks in the United
States and 171 in foreign countries. We have research and development expenses
of $7.7 million, $7.8 million, and $7.6 million in fiscal 1999, 1998, and 1997,
respectively, and have budgeted $8.4 million for research and development in
fiscal 2000.
We conduct most of our research and development in 40,000 square feet of
space in our Logan, Utah headquarters. This facility includes plastic,
mechanical and electrical engineering capabilities that are used in creating
proprietary designs and features.
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CUSTOMERS
Our largest customer for the past several years has been Sears. In fiscal
1999, Sears accounted for approximately 38.4% of our total net sales, a 5.9%
increase over fiscal 1998. While no other single customer accounted for more
than 10% of our total sales in fiscal 1999, other important customers include
Sam's Wholesale Club, K-Mart and Wal-Mart. In fiscal 1999 and 1998, Sam's
accounted for approximately 45% and 50% respectively, of net sales at our
JumpKing subsidiary. Although sales to Sears still account for a substantial
portion of our sales, the percentage of sales has decreased substantially in the
past several years from approximately 68% in fiscal 1989. Nevertheless, the
dollar amount of our net sales to Sears has increased during this time period.
Sears has distinguished us with several vendor awards for our commitment in
providing quality and value to the American consumer.
We have more than 2,500 customers, excluding those consumers we sell to
directly through our retail or Internet distribution channels. Consistent with
industry practice, we generally do not have long-term purchase agreements or
other commitments from our customers as to levels of future sales. The level of
our sales to large customers depends in large part on our continuing commitment
to home fitness products and the success of our efforts to market and promote
our products as well as our competitiveness in terms of price, quality, product
innovation and customer service. We are not the exclusive supplier of home
fitness equipment to any of our major customers. The loss of, or a substantial
decrease in the amount of purchases by, or a write-off of any significant
receivable due from, any of our major customers would have a material adverse
effect on our business.
COMPETITION
The home fitness equipment market is both fragmented and highly competitive.
It is characterized by frequent introduction of new products, often accompanied
by major advertising and promotional programs. We believe that the principal
competitive factors affecting our business include price, quality, brand name
recognition, product innovation and customer service. According to the Sports
Marketing Group, Inc. 1998 Annual Report, we account for nearly half of the
total industry revenue (based on retail dollars) for the home fitness equipment
market.
We compete in the U.S. with recreational and exercise activities offered by
health clubs, as well as a number of domestic manufacturers, domestic direct
importers, foreign companies exporting products to the U.S. and, in our direct
sales efforts, with major retailers and distributors. Competitors in these areas
include Fitness Quest, Life Fitness, Cybex/Trotter, Precor, Inc. and Schwinn. In
Europe, we compete principally with Tunturi, Inc., and Kettle Int'l Inc., a
number of Asian importers and some of our domestic competitors. Our products
also indirectly compete with outdoor fitness, sporting goods and other
recreational products. Competitors in these product areas include Huffy
corporation, Canstar Sports Inc. (a subsidiary of Nike Inc.), Reebok
International Ltd. and Rollerblade, Inc. Certain competitors are better
capitalized than us and may have greater financial and other resources than
those available to us. In addition, there are no significant technological,
manufacturing or marketing barriers to entry into the fitness equipment or other
exercise accessory markets, although many companies in the industry, including
our company, have sought and received numerous patents in an effort to protect
their competitive position.
PURSUING GROWTH OPPORTUNITIES
On December 23, 1998, we bought inventory, trademarks and other assets of
NordicTrack, Inc., a debtor under Chapter 11 of the Bankruptcy Code, for
$10.2 million. In connection with the NordicTrack transaction, our company and
Sears executed a license agreement that allows Sears to be the exclusive
retailer of NordicTrack branded fitness equipment outside of our own retail and
direct marketing channels of distribution. In addition, under the agreement, we
granted Sears a royalty-
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bearing exclusive license to market fitness apparel and sporting goods under the
NordicTrack brand. The agreement will run for a term of 12 years subject to
early termination provisions in 2005.
In August 1996, we purchased substantially all the assets of
HealthRider, Inc. We market HealthRider brand fitness equipment and other
health-related products primarily through our own specialty retail stores and
kiosks, through direct response advertising in print and on television, through
our mail order catalogs and through some retail customers. At the end of fiscal
1999, we operated 77 stores in approximately 42 states.
In the first quarter of 1996, we began to directly market our products in
the U.K., France, Italy and the Benelux countries. Prior to 1996, we had minimal
foreign sales. Net sales from European markets in fiscal 1998 and 1999 were
$40.4 million and $37.9 million, respectively. Net sales from our Canadian
manufacturing facility for fiscal 1998 and 1999 were $22.3 million and $23.7,
respectively.
MANUFACTURING AND PURCHASING
In fiscal 1999, we manufactured or assembled over 80% of our products at our
facilities in Utah, Texas, Canada and Colorado. The balance of our products were
manufactured and assembled by third parties, principally in the Far East. We
have long-standing supply relationships with a number of offshore Asian vendors,
many of which have exclusive relationships in the fitness industry with us. The
combination of internal manufacturing and assembly capacity and our access to
third-party vendors has helped us meet customer demand on a competitive basis.
In addition, the third party vendors provide greater flexibility in
manufacturing capacity to satisfy seasonal demands.
We utilize more than 1.4 million square feet for manufacturing, including a
300,000 square foot facility in Logan where the majority of our treadmills are
manufactured or assembled. In the past, the Logan facility has also manufactured
stair steppers, exercise bikes and home gyms. We constructed our Logan plant in
1990 and equipped the facility with modern manufacturing and assembly features,
including fully integrated metal fabrication, powder coat painting, robotic
welding and injection molding equipment. In 1990, we purchased a trampoline
manufacturing operation in Dallas, Texas. These facilities produce the JumpKing
Trampoline Brand. In 1994, we began operating our Clearfield, Utah manufacturing
facility. In 1996, we expanded our manufacturing capacity by 233,000 square feet
through the acquisition of our Canadian manufacturing facility in St. Jerome,
Canada. The Weidercare facility, formerly located in Denver, Colorado, was
relocated in the spring of 1999 to the Dallas area.
We apply a management system to control and monitor freight, labor, overhead
and material cost components of our finished goods. We emphasize product quality
by monitoring operations according to uniform quality control standards. In
fiscal 1994, we received ISO 9001 certification for our Logan facility. ISO is a
nonprofit association that monitors industrial companies' manufacturing
processes, quality assurance controls, personnel management and customer service
in order to improve plant efficiency, product quality, customer satisfaction and
company profitability.
EMPLOYEES
We currently employ approximately 4,328 people, 142 of whom are represented
by a Canadian labor union. Factory employees are compensated through a targeted
incentive system. Managerial employees receive bonuses tied to the achievement
of performance targets. Approximately 248 employees are engaged in research and
development, 72 in sales and marketing, 2,747 in manufacturing and 768 in other
areas, primarily administrative.
ENVIRONMENTAL MATTERS
Our operations are subject to federal, state and local environmental and
health and safety laws and regulations that impose workplace standards and
limitations on the discharge of pollutants into the
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environment and establish standards for the handling, generation, emission,
release, discharge, treatment, storage and disposal of materials, substances and
wastes. The nature of our manufacturing and assembly operations exposes us to
the risk of claims with respect to environmental matters, and although
compliance with local, state and federal requirements relating to the protection
of the environment has not had a material adverse effect on our financial
condition or results of operations, there can be no assurance that material
costs or liabilities will not be incurred in connection with such environmental
matters. Future events, such as changes in existing laws and regulations or
enforcement policies or the discovery of contamination on sites owned or
operated by us, may give rise to additional compliance costs or operational
interruptions which could have a material adverse effect on our financial
condition.
SEASONALITY
We sell the majority of our products to our customers in our second and
third fiscal quarters (i.e., from September through February). Increased sales
and distribution typically occur in the Christmas retail season and the
beginning of a new calendar year because of increased customer promotions,
increased consumer purchases and seasonal changes that prompt people to exercise
inside. We have in the past, from time to time, incurred net losses in our first
and fourth fiscal quarters of its fiscal year. If actual sales for a quarter do
not meet or exceed projected sales for that quarter, expenditures and inventory
levels could be disproportionately high for such quarter and our cash flow and
earnings for that quarter and future quarters could be adversely affected. The
timing of large orders from customers and the mix of products sold may also
contribute to quarterly or other periodic fluctuations.
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PROPERTIES
The location, square footage, status and primary use of our principal
properties are set forth below:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE STATUS PRIMARY USES
-------- -------- ----------------------- -------------------------------
<S> <C> <C> <C>
Garland, TX 61,043 Leased (Expires 11/01) Offices, Manufacturing,
Warehousing
80,000 Leased (Expires 1/01) Manufacturing, Storage
83,160 Leased (Expires 1/01) Finished Goods
15,295 Leased (Expires 1/01) Spa Manufacturing
125,000 Leased (Expires 2/04) Office, Manufacturing,
Warehousing
Ogden, UT 391,338 Leased (Month to Month) Warehouse
South Brunswick, NJ 255,600 Leased (Expires 5/00) Warehouse
West Valley City, UT 6,635 Leased (Month to Month) Offices
San Luis Obispo, CA 4,950 Leased (Month to Month) Warehouse
Anzin, France 8,097 Leased (Month to Month) Warehouse, Offices, Apartment
Carrieres Sur Seine, France 2,966 Leased (Month to Month) Warehouse, Offices
Neuilly Sur Seine, France 262 Leased (Month to Month) Apartment
Leeds, UK 6,000 Leased (Month to Month) Offices
Perguia, Italy 3,360 Leased (Expires 6/01) Offices
6,600 Leased (Month to Month) Warehouse
Mirabel, Quebec 213,300 Leased (Expires 6/00) Warehouse
43,515 Leased (Month to Month) Warehouse
St. Jerome, Quebec 65,835 Owned Manufacturing, Offices
105,984 Leased (Expires 7/02) Warehouse
61,852 Owned Manufacturing, Offices
Clearfield, UT 329,075 Leased (Month to Month) Warehouse
161,564 Leased (Expires 12/03) Warehouse
76,000 Leased (Expires 6/00) Warehouse
120,000 Leased (Expires 6/00) Warehouse, Manufacturing
76,800 Leased (Expires 3/02) Office, Manufacturing
Logan, UT 300,000 Owned Manufacturing, Offices, R&D
68,750 Leased (Expires 6/01) Warehouse
17,913 Leased (Month to Month) Warehouse
18,003 Leased (Month to Month) Warehouse
50,000 Leased (Month to Month) Warehouse
Smithfield, UT 88,555 Leased (Expires 10/04) Manufacturing
64,275 Leased (Expires 9/01) Manufacturing
</TABLE>
We believe that our existing facilities are well maintained, in good
operating condition and adequate for our expected level of operations. Although
a number of our facilities are rented on a month to month basis, we do not
anticipate difficulty in maintaining access to facilities required for the
conduct of our business.
LEGAL PROCEEDINGS
Due to the nature of our products, we are subject to legal proceedings,
including product liability claims involving personal injuries allegedly related
to our products. We are also party to a variety of non-product liability
commercial suites involving contract claims and intellectual property claims.
In connection with the September recapitalization, we amended the indenture
governing the 13% notes to delete substantially all restrictive covenants
contained in that indenture. On March 28, 2000, three affiliated investments
funds holding the $1.5 million principal amount of 13% notes that remains
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outstanding filed an action entitled THE BOND OPPORTUNITY FUND #1, L.L.C. V.
ICON HEALTH & FITNESS, INC. ET AL. in the District Court of the 43rd Judicial
District, Parker County, Texas against us, our directors and senior management,
Bain Capital, some of Bain Capital's officers and other interested parties
seeking compensatory and punitive damages in an unspecified amount. The
plaintiffs alleged in their complaint that the consummation of the September
recapitalization was wrongful and that we, our officers, directors and
management breached fiduciary duties allegedly owed to the plaintiffs, as
holders of 13% notes. On May 18, 2000, we reached a settlement agreement with
the plaintiffs. We agreed in the settlement to acquire the $1.5 million
principal amount of 13% notes owned by the plaintiffs for a purchase price of
$1,815,000 plus accrued interest on the 13% notes through the date of closing of
the settlement in return for a complete release of all claims against the
defendants. The 13% notes were scheduled to mature on July 15, 2002, and we were
otherwise required to repay these notes in full on that date.
We continue to believe that the September recapitalization was in the best
interest of our company and that we would have prevailed in the litigation.
However, when we considered the soon approaching maturity of the 13% notes, our
belief that our cost of defending this litigation would be considerably greater
than the $315,000 premium over par we agreed to pay to settle the matter, and
the potential this litigation had to distract our management team, we concluded
that this settlement was in the best interest of our company.
In addition, on May 10, 2000, we agreed to allow the last remaining holder
of 14% notes, the Brinson Relationship Funds--US High Yield Fund, to tender its
$7 million principal amount of 14% notes and receive warrants to purchase HF
Holdings common stock on the same terms as the holders that participated in the
September recapitalization. This transaction was consummated on June 23, 2000.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of our company, and their ages, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- -----------------------------------------------------
<S> <C> <C>
Scott R. Watterson..................... 44 Chairman of the Board and Chief Executive Officer
Gary E. Stevenson...................... 44 President, Chief Operating Officer and Director
Robert C. Gay.......................... 47 Vice Chairman of the Board
Ronald P. Mika......................... 38 Director
S. Fred Beck........................... 41 Chief Financial and Accounting Officer, Vice
President and Treasurer
David J. Watterson..................... 40 Vice President, Marketing and Research and
Development
Jon M. White........................... 51 Vice President, Manufacturing
William T. Dalebout.................... 51 Vice President, Design
Greg Benson............................ 45 Director
David J. Matlin........................ 38 Director
Chris R. Pechock....................... 35 Director
Stanley C. Tuttleman................... 80 Director
W. McComb Dunwoody..................... 55 Director
</TABLE>
SCOTT R. WATTERSON. Mr. Watterson has served as President and Chief
Executive Officer of Weslo since he co-founded Weslo in 1977 and has served as
President and Chief Executive Officer of ProForm since 1988. In November 1994,
Mr. Watterson became Chairman of the Board and Chief Executive Officer of our
company. In addition, Mr. Watterson is a director of American Pad and Paper
Company and the Utah State University Foundation. He is also on the Board of
Trustees for the Utah Foundation and the Make-A-Wish Foundation of Utah.
GARY E. STEVENSON. Mr. Stevenson has served as Chief Operating Officer of
Weslo since he co-founded Weslo in 1977 and has served as Chief Operating
Officer of ProForm since 1988. In November 1994, Mr. Stevenson became President,
Chief Operating Officer and a Director of our company.
ROBERT C. GAY. Mr. Gay became Vice Chairman of the Board of Directors of
our company in November 1994. Mr. Gay has been a Managing Director of Bain
Capital since April 1993 and has been a General Partner of Bain Venture Capital
since February 1989. In addition, Mr. Gay serves as a director of American Pad
and Paper Company, Nutraceutical, Cambridge Industries, Inc., GS Technologies
Corporation, Anthony Crane, and Alliance Laundry.
RONALD P. MIKA. Mr. Mika became a Director of our company in
November 1994. Mr. Mika joined Bain Capital in 1989, where he has been managing
Director since 1996. In addition, Mr. Mika serves as a director of Cambridge
Industries, Kranson Industries, and PSI.
S. FRED BECK. Mr. Beck has served as the Chief Financial Officer of Weslo
since 1989. Mr. Beck became Chief Financial and Accounting Officer, Vice
President and Treasurer of our company in November 1994.
DAVID J. WATTERSON. Mr. Watterson has served as Vice President of Marketing
and Research and Development of Weslo since 1992 and has continued in that
position with our company since November 1994. Prior to 1992, Mr. Watterson
served as Vice President of Sales of Weslo. He joined our company in 1980. Mr.
Watterson is Scott R. Watterson's brother.
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JON M. WHITE. Mr. White has served as Vice President of Manufacturing of
Weslo since 1988 and has continued in that position with our company since
November 1994.
WILLIAM T. DALEBOUT. Mr. Dalebout has served as Vice President of Design of
Weslo since 1987 and has continued in that position with our company since
November 1994.
GREG BENSON. Mr. Benson became a Director of our company in
September 1999. Mr. Benson has been an executive vice president of Bain Capital
since 1996. Prior to joining Bain Capital, Mr. Benson was the Chief Financial
Officer of American Pad and Paper Company. In addition, Mr. Benson serves as a
director of American Pad and Paper Company.
DAVID J. MATLIN. Mr. Matlin became a Director of our company in
September 1999. Mr. Matlin is a managing director of Credit Suisse First Boston.
Mr. Matlin joined Credit Suisse First Boston in May 1994. Prior to that,
Mr. Matlin was most recently a partner at Merrion Group LP, a boutique
securities firm that he co-founded in 1991. In addition, Mr. Matlin is a
director of Imagyn Medical Technologies, California Coastal Communities,
Vacocor Inc., and Forstmann Textiles.
CHRIS R. PECHOCK. Mr. Pechock became a director of our company in
September 1999. Mr. Pechock has been a Vice President of Credit Suisse First
Boston since 1999. Prior to joining Credit Suisse First Boston Corporation,
Mr. Pechock was a portfolio manager at Turnberry Capital Management from 1997
until 1999 and at Eos Partners from 1996 until 1997. From 1993 until 1996,
Mr. Pechock was a Vice President of PaineWebber, Incorporated.
STANLEY C. TUTTLEMAN. Mr. Tuttleman became a director of our company in
September 1999. Mr. Tuttleman is the CEO and President of Tuttson Capital Corp.
and the Chairman of the Board and CEO of Telepartners, Inc. In addition,
Mr. Tuttleman is a director of Mothers Work, Inc., and a trustee of the Franklin
Institute, the Philadelphia Orchestra, the Philadelphia Museum of Art, Graduate
Hospital, Gratz College and the Harrison Foundation.
W. MCCOMB DUNWOODY. Mr. Dunwoody became a director of our company in
September 1999. Mr. Dunwoody founded the Inverness Group Incorporated in 1981.
He has served as Managing Director of Inverness Management LLC since 1996 and is
General Partner of its Fund. Mr Dunwoody was a member of the Corporate Finance
Departments of the First Boston Corporation and Donaldson, Lufkin & Jenrette. He
is Chairman of the Executive Committee of the Board of Directors of National-
Oilwell, Inc.
39
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
fiscal 1999, 1998 and 1997 for Mr. Scott Watterson and our other four most
highly compensated executive officers (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------ ALL OTHER
FISCAL SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1)
--------------------------- -------- --------- --------- ------------
<S> <C> <C> <C> <C>
Scott R. Watterson............................... 1999 472,500 219,000 1,800
Chairman of the Board and Chief 1998 472,500 220,300 1,800
Executive Officer 1997 450,000 1,047,384 2,250
Gary E. Stevenson................................ 1999 420,000 219,000 1,800
President and Chief Operating Officer 1998 420,000 220,300 1,800
1997 400,000 1,047,384 2,250
S. Fred Beck..................................... 1999 210,000 40,000 1,853
Chief Financial and Accounting Officer 1998 188,000 39,300 2,234
Vice President and Treasurer 1997 178,920 144,533 79,506(3)
David J. Watterson............................... 1999 252,000 40,000 925
Vice President, Marketing and 1998 229,000 39,300 1,920
Research and Development 1997 218,325 144,533 78,696(3)
Richard Hebert................................... 1999 297,799 161,473 8,736
General Manager, ICON 1998 318,916 187,097 5,939
Du Canada, Inc. 1997 388,043(2) -- 9,440
</TABLE>
------------------------
(1) Includes amounts contributed by our company for the benefit of the Named
Executive Officers under our 401 (k) Plan.
(2) Represents Mr. Hebert's salary from September 6, 1996, the date of the ICON
of Canada acquisition, to May 31, 1997.
(3) Includes forgiveness by our company of a $60,000 loan to Mr. Beck and
Mr. David Watterson.
40
<PAGE>
The following table sets forth information as of May 31, 1999, concerning
options of IHF Capital, Inc., our former indirect parent company exercised by
each of the Named Executive Officers in 1999 and year end option values:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS OPTIONS AT
ACQUIRED VALUE AT MAY 31, 1999(#) MAY 31, 1999($)(1)
ON REALIZED -------------------------- -------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- -------------------------- -------------------------
CLASS A CLASS A CLASS A CLASS L CLASS L CLASS A
COMMON COMMON COMMON COMMON COMMON COMMON
STOCK STOCK STOCK STOCK STOCK STOCK
<S> <C> <C> <C> <C> <C> <C>
Scott Watterson................ -- -- 469,988/0 48,620/0 -/- -/-
Gary Stevenson................. -- -- 375,251/0 37,816/0 -/- -/-
S. Fred Beck................... -- -- 77,383/0 -- -/- -/-
David J. Watterson............. -- -- 62,285/0 -- -/- -/-
Richard Hebert................. -- -- -- -- -/- -/-
</TABLE>
------------------------
(1) As of May 31, 1999 there was no market for the common stock of IHF
Capital, Inc. Due to the financial condition of our company at May 31, 1999,
no value was attributed to the equity underlying these options.
1999 JUNIOR MANAGEMENT STOCK OPTION PLAN
In September 1999 HF Holdings, adopted its 1999 Junior Management Stock
Option Plan (the "1999 Stock Option Plan") which provides for the grant to
eligible employees of our company of nonstatutory options. A total of 330,000
shares of common stock were reserved for issuance under the 1999 Stock Option
Plan, which is administered by the Board of Directors or a committee thereof.
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not maintain a compensation committee during 1999. Messrs. Scott
Watterson's and Stevenson's 1999 compensation was determined prior to the
September recapitalization pursuant to employment contracts that had been in
place since 1989 and, after the September recapitalization, pursuant to the
newly entered into employment agreements described below under the caption
"--Employment Agreements". Messrs. Watterson and Stevenson participated in the
deliberations concerning the compensation of other officers, and Mr. Beck
participated in the deliberations concerning the compensation of officers other
than himself and Messrs. Watterson and Stevenson. See "Transactions Between Our
Company and Officers, Directors and Principal Stockholders."
COMPENSATION OF DIRECTORS
Our directors do not receive any compensation for serving on our Board of
Directors in 1999, and are not entitled to receive compensation in connection
with their current service. Directors are reimbursed for their out-of-pocket
expenses incurred in connection with their service as directors. The Company
also maintains liability insurance policies for our directors. See "Transactions
Between Our Company and Officers, Directors and Principal
Stockholders--Management Fees" for a more detailed description of these
arrangements.
41
<PAGE>
EMPLOYMENT AGREEMENTS
On September 27, 1999 we entered into new three year employment agreements
with each of Scott Watterson and Gary Stevenson. The employment agreements
provide for the continued employment of Mr. Watterson as Chairman and Chief
Executive Officer with an increase in base salary from $450,000 to $525,000 and
Mr. Stevenson as President and Chief Operating Officer with an increase in base
salary from $400,000 to $475,000. Except as set forth below, in all other
material respects the agreements are substantially identical.
On September 27, 1999, each of Mr. Watterson and Mr. Stevenson received a
bonus of $500,000. Each executive is also entitled to participate in a bonus
program providing for a bonus equal to a percentage of the consolidated EBITDA
(as defined in our credit facility) of our company and our subsidiaries (our
"EBITDA") which percentage shall equal 1.25% for Mr. Watterson and 1.10% for
Mr. Stevenson. The executives will not be entitled to a bonus, however, unless
our Profits exceed 5.5% of net sales.
We may terminate each executive's employment (1) for cause as provided in
each agreement, (2) upon six months' disability, or (3) without cause. Each
executive may similarly terminate his employment immediately for cause as
provided in his employment agreement, upon three months notice to perform
full-time church service or for any reason upon six months' notice. In the event
we terminate either executive's employment for cause, or such employment
terminates as a result of the death of the executive, as the case may be, the
executive will not be entitled to further salary, benefits or bonus. If we
terminate the executive's employment without cause, or the executive terminates
his employment with or without cause, we will be obligated to pay the executive
his salary and bonus for a period of two years from the date of termination,
provided, that if the executive should terminate his employment prior to
September 27, 2000 (other than with cause or to perform full time church
service), such executive shall forego $500,000 of severance compensation
otherwise payable to such executive. If we terminate the executive's employment
upon the executive's disability, we are obligated to pay as severance an amount
equal to one month's base salary then in effect for each calendar year or part
thereof elapsed since January 1, 1988 provided that such severance pay is
reduced by payments under applicable disability insurance.
The employment agreements prohibit the executives from engaging in outside
business activity during the term, subject to exceptions. The employment
agreements provide for customary confidentiality obligations and, in addition, a
non-competition obligation for a period of four years following termination (two
years if the executive quits with cause or without cause or is terminated
without cause, except that we may, at our option, extend such period for up to
two additionally years by paying the executive his salary and bonus during the
extended period).
Under the employment agreements, the executives (and their affiliates) shall
be entitled to indemnification to the fullest extent allowed by Delaware law
with respect to all losses, costs, expenses and other damages in connection with
any lawsuits or other claims brought against them in their capacity as officers
or directors or shareholders (or affiliates thereof) of HF Holdings or any of
its past or present parent or subsidiary or other affiliated companies,
including ICON Fitness and IHF Holdings, the parent companies.
42
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
HF Holdings owns all of the outstanding common stock of our company. The
following table and related notes set forth information with respect to the
beneficial ownership of HF Holdings' 7,771,613 outstanding shares of common
stock as of March 28, 2000 by (i) each person known to HF Holdings to
beneficially own more than 5.0% of the outstanding shares of common stock of HF
Holdings, and (ii) each director and executive officer of HF Holdings
individually and (iii) all directors and executive officers of HF Holdings as a
group.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED (1)(2)
-------------------------
PERCENT OF
NUMBER OF OUTSTANDING
NAMES SHARES SHARES
----- ----------- -----------
<S> <C> <C>
Scott R. Watterson+ (3)..................................... 376,000 4.86%
c/o ICON Health& Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
Gary E. Stevenson+ (4)...................................... 292,700 3.78%
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
The Bain Funds (5).......................................... 5,161,035 66.69%
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Robert C. Gay+ (6).......................................... 5,161,035 66.69%
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Ronald P. Mika+ (6)......................................... 5,161,035 66.69%
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Greg Benson+ (6)............................................ 5,161,035 66.69%
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Credit Suisse First Boston Corp (7)(8)...................... 1,312,933 16.96%
c/o Credit Suisse First Boston Corp.
Eleven Madison Avenue
New York, New York 10010-3629
Christopher Pechock+ (9).................................... 1,312,933 16.96%
c/o Credit Suisse First Boston Corp.
Eleven Madison Avenue
New York, New York 10010-3629
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED (1)(2)
-------------------------
PERCENT OF
NUMBER OF OUTSTANDING
NAMES SHARES SHARES
----- ----------- -----------
<S> <C> <C>
David Matlin+ (9)........................................... 1,312,933 16.96%
c/o Credit Suisse First Boston Corp.
Eleven Madison Avenue
New York, New York 10010-3629
HF Investment Holdings, LLC................................. 5,160,035 66.68%
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
W. McComb Dunwoody+ (10).................................... 344,002 3.44%
c/o Inverness/Phoenix Capital LLC
660 Steamboat Road, 2nd Floor
Greenwich, Connecticut 06830
Stanley Tuttleman+ (11)..................................... 172,002 1.72%
Tuttson's Inc.
349 Montgomery Avenue
P.O. Box 22405
Bala Cynwyd, Pennsylvania 19004
David Watterson (12)........................................ 18,173 --
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
S. Fred Beck (12)........................................... 15,149 --
c/o ICON Health & Fitness, Inc.
1500 South 1000 West
Logan, Utah 84321
All directors and executive officers as a group (9 7,173,990 92.31%
persons)..................................................
</TABLE>
------------------------
+ Director of HF Holdings
(1) The common stock of HF Holdings consists of two classes of shares, par value
$0.001 per share common stock and par value $0.001 preferred stock. There
are twelve million authorized shares of common stock and ten thousand
authorized shares of preferred stock. Subject to the Stockholders Agreement
described below, each holder of common stock is entitled to one vote per
share for the election of directors and for all other matters to be voted on
by HF Holdings' stockholders. Subject to preferences that may be applicable
to any outstanding series of preferred stock, the holders of common stock
are entitled to share ratably in such dividends, if any, as may be declared
form time to time by the Board of Directors from funds legally available.
Upon liquidation or dissolution of HF Holdings, subject to preferences that
may be applicable to any outstanding series of preferred stock, the holders
of common stock are entitled to share ratably in all assets available for
distribution to stockholders.
(2) Except as otherwise indicated, (a) each owner has sole voting and investment
power with respect to the shares set forth and (b) the figures in this table
are calculated in accordance with Rule 13d-3, as amended, under the Exchange
Act of 1934. The table includes the HF Holdings
44
<PAGE>
Warrants (which have an exercise price, subject to adjustment, of $.01 per
share) which are presently exercisable. HF Holdings' Certificate of
Incorporation provides that HF Holdings may, by vote of its Board of
Directors, designate the numbers, relative rights, preferences and
limitations of one or more series of preferred stock and issue the
securities so designated. All current stockholders of HF Holdings (other
than IHF Holdings) are parties to a Stockholders Agreement pursuant to which
(a) some holders affiliated with management are entitled to elect two
directors, (b) some holders affiliated with Credit Suisse First Boston are
entitled to elect two directors and (c) Bain Capital Fund IV, L.P., Bain
Capital Fund IV-B, L.P., BCIP Associates and BCIP Trust Associates, L.P.
(collectively, the "Bain Funds") are entitled to elect all remaining
directors. In addition, the Bain Funds are entitled to direct how these
other stockholders will cast their votes with respect to some matters,
including a public offering of HF Holdings or the disposition of its assets.
The Stockholders Agreement also contains other agreements among the
stockholders of HF Holdings and HF Holdings which are described under
"Transactions Between Our Company and Officers, Directors and Principal
Stockholders--The Equity Investment--Stockholders Agreement." The shares
reported in this table as owned by a stockholder do not include the shares
over which such stockholder has the right to direct the vote pursuant to the
Stockholders Agreement.
(3) Includes 1,000 shares owned by IHF Holdings, of which Mr. Watterson is
deemed the beneficial owner by virtue of being a director. Mr. Watterson
disclaims beneficial ownership of any such shares in which he does not have
a pecuniary interest. Excludes shares which may be distributable by HF
Investments Holdings in some events.
(4) Includes 1,000 shares owned by IHF Holdings, of which Mr. Stevenson is
deemed the beneficial owner by virtue of being a director. Mr. Stevenson
disclaims beneficial ownership of any such shares in which he does not have
a pecuniary interest. Excludes shares which may be distributable by HF
Investments Holdings, in some events.
(5) Includes 5,160,035 shares beneficially owned by HF Investment Holdings, of
which the Bain Funds may be deemed the beneficial owners by virtue of their
control of HF Investment Holdings pursuant to its operating agreement. Also
includes 1,000 shares owned by IHF Holdings, of which the Bain Funds may be
deemed the beneficial owners by virtue of the fact that one or more of their
general partners or principals, or one or more general partners or
principals of one of their general partners, is a director of IHF Holdings.
The Bain Funds disclaim beneficial ownership of any shares in which they do
not have a pecuniary interest.
(6) Includes the shares beneficially owned by each of the Bain Funds, of which
each of Mr. Gay, Mr. Mika or Mr. Benson may be deemed the beneficial owner
by virtue of being a general partner or principal, or a general partner or a
principal of the general partner, of such Bain Fund. Also includes 1,000
shares owned by IHF Holdings, of which each of Mr. Gay, Mr. Mika or
Mr. Benson may be deemed the beneficial owner by virtue of each being a
director. Each of Mr. Gay, Mr. Mika or Mr. Benson disclaims beneficial
ownership of any such shares in which it does not have a pecuniary interest.
(7) Excludes (a) 1,931,263 shares receivable upon conversion of convertible
subordinated notes, (b) shares which may be distributable in some events
upon exercise in full of a warrant to purchase Class C Units of HF
Investments Holdings and (c) up to 1,030,000 shares owned by HF Investments
Holdings which are subject to an option exercisable only upon the occurrence
of some events.
(8) Includes 669,179 shares of common stock subject to purchase upon exercise of
warrants that are presently exercisable.
(9) Includes 1,312,933 shares beneficially owned by Credit Suisse First Boston,
of which each of Mr. Pechock or Mr. Matlin may be deemed the beneficial
owner by virtue of each being officers of Credit Suisse First Boston. Each
of Mr. Pechock or Mr. Matlin disclaims beneficial ownership of any such
shares in which it does not have a pecuniary interest.
45
<PAGE>
(10) Excludes shares which may be distributable by HF Investments Holdings in
some events to Inverness/Phoenix Capital LLC ("Inverness") of which Mr.
Dunwoody may be deemed the beneficial owner by virtue of being a general
partner or principal of Inverness. Mr. Dunwoody disclaims beneficial
ownership of any such shares in which he does not have a pecuniary interest.
(11) Excludes shares which may be distributable by HF Investment Holdings in
some events.
(12) Represents shares of HF Holdings issuable upon exercise of the vested
portion of options awarded pursuant to the 1999 HF Holdings Junior
Management Stock Option Plan. Excludes up to 47,264 shares for David
Watterson and up to 39,396 shares for S. Fred Beck owned by HF Investment
Holdings, LLC which are subject to an option exercisable only upon the
occurrence of certain events.
All of the outstanding common stock of our company, owned by HF Holdings,
has been pledged to the lenders under the new credit facilities. If we were to
default under these new credit facilities, the lenders could foreclose on the
pledge and take control of our company.
46
<PAGE>
TRANSACTIONS BETWEEN OUR COMPANY AND OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS
THE EQUITY INVESTMENT
GENERAL. As part of our September recapitalization, affiliates of Bain
Capital and its designees, Scott Watterson and Gary Stevenson, and Credit Suisse
First Boston and its affiliates made an equity investment of $40 million in HF
Holdings which then contributed that money to the equity of our company.
INVESTMENT BY BAIN AFFILIATES AND SENIOR MANAGEMENT. The Bain Affiliates
(and their designees), CSFB and Senior Management purchased membership interests
in HF Investment Holdings, LLC ("HF Investment Holdings") for an aggregate of
$30 million of cash. The Bain Affiliates purchased $14,950,000 worth of
membership interests in the form of Class B Units, each member of Senior
Management purchased $2,500,000 worth of membership interests in the form of
Class A Units, CSFB purchased for $5,000,000 a warrant (the "CSFB Warrant") to
purchase Class C Units and designees of the Bain Affiliates purchased an
aggregate of $5,050,000 worth of Class C Units. See "--The LLC Agreement" for a
description of the limited liability company agreement of HF Investment Holdings
and the Class A Units, Class B Units, Class C Units and the CSFB Warrant issued
thereunder.
HF Investment Holdings in turn purchased for $30.0 million in cash 5,160,035
shares of the common stock of HF Holdings (or approximately 51.6% of the common
stock of HF Holdings outstanding on a fully diluted basis upon consummation of
the September recapitalization).
INVESTMENT BY CSFB. In addition to its investment in HF Investment
Holdings, CSFB purchased for an aggregate purchase price of $10.0 million in
cash convertible notes (which are reflected as common stock on HF Holdings'
balance sheet) and stock aggregating (on an as-converted basis) 2,575,017 shares
of the common stock of HF Holdings (or approximately 25.7% of the common stock
of HF Holdings outstanding on a fully diluted basis upon the consummation of the
September recapitalization). The convertible notes purchased by CSFB will mature
on September 27, 2011, with no interest accruing thereon and no payments of
principal until maturity. The notes (x) are convertible (by the holders thereof
or by HF Holdings), subject to limited exceptions, into shares of common stock
of HF Holdings upon a liquidation, insolvency or Liquidity Event (as defined
below) and (y) automatically convert into shares of common stock of HF Holdings
upon a bankruptcy, in each case at a conversion price of $3.88347 per share
(subject to readjustment upon stock splits, stock dividends and combinations of
shares).
Prior to the September recapitalization, CSFB held 10% of our then
outstanding 13% Senior Subordinated Notes, 76% of the then outstanding 15%
Senior Secured Discount Notes of IHF Holdings and 83% of the then outstanding
14% Senior Discount Notes of ICON Fitness. CSFB received, as a participant in
the private exchange offers, an aggregate of approximately $4.0 million in cash,
$4.5 million principal amount of 12% notes and warrants to purchase 669,179
shares of common stock of HF Holdings.
MANAGEMENT EQUITY GRANT. On September 27, 1999, HF Holdings issued to Scott
Watterson and Gary Stevenson, without cost, an aggregate of 666,700 shares of
the common stock of HF Holdings (or approximately 6.7% of its common stock
outstanding on a fully diluted basis upon the consummation of the September
recapitalization). Mr. Watterson received 375,000 of these shares, while
Mr. Stevenson received 291,700 shares.
STOCKHOLDERS AGREEMENT. On September 27, 1999, we entered into a
stockholders agreement (the "Stockholders Agreement") with HF Holdings,
HF Investment Holdings, the Bain Affiliates and their designees, Senior
Management and CSFB. Holders of our 13% Senior Subordinated Notes, the 15%
Senior Secured Discount Notes of IHF Holdings and the 14% Senior Discount Notes
of ICON Fitness
47
<PAGE>
who tendered their notes in the September recapitalization (other than CSFB) and
received warrants to acquire HF Holdings common stock (the "Non-CSFB
Warrantholders") are entitled to registration rights under the Stockholders
Agreement with respect to the shares of common stock issuable upon exercise of
such warrants. For purposes of the Stockholders Agreement, prior to the
liquidation of the LLC, any reference to the "Bain Holders" shall be to the LLC
and subsequent to such liquidation, any reference to "Bain Holders" shall be to
the Bain Affiliates and any Bain designees who held Class B Units in the LLC.
All other shareholders (other than the Non-CSFB Warrantholders) party to the
Stockholders Agreement shall be referred to as the "Other Holders."
Junior Management Option. Under the Stockholders Agreement, the LLC granted
to some junior managers of our company ("Junior Management") an option to
purchase 216,700 shares of the common stock of HF Holdings (or approximately
2.17% of the common stock of HF Holdings outstanding on a fully diluted basis
after the consummation of the September recapitalization) (the "Junior
Management Option"). The Junior Management Option is exercisable for an exercise
price of $5.83 per share and will expire on September 27, 2011 or, if not
exercised in full, upon consummation of a Liquidity Event. Subject to
acceleration upon the occurrence of a Liquidity Event, 25% of the Junior
Management Option vested on September 27, 1999 and the remaining 75% will vest
in three equal installments over the next three anniversaries of September 27,
1999. The Junior Management Option is exercisable solely upon the occurrence of
a Liquidity Event.
As used herein, a "Liquidity Event" means (i) the consummation of an initial
public offering of the common stock of HF Holdings with gross proceeds greater
than $50.0 million, (ii) a merger or consolidation of HF Holdings or our
company, or sale of stock of HF Holdings or our company, in which the holders of
outstanding voting securities of HF Holdings immediately after giving effect to
the September recapitalization (treating as "holders" for such purpose any
holder of membership interests in the LLC) cease to own, directly or indirectly,
greater than 51% of the outstanding voting securities of the entity surviving
such merger or consolidation or sale or (iii) a sale of all or substantially all
of the assets of HF Holdings or our company.
CSFB Option. Under the Stockholders Agreement, the LLC granted to CSFB an
option (the "CSFB Option") to purchase a percentage of the common stock of HF
Holdings held by the LLC immediately after the consummation of the September
recapitalization. The percentage shall be (i) 12.5% from September 27, 1999
through March 26, 2001, (ii) 15% from March 27, 2001 through October 26, 2001,
(iii) 17.5% from October 27, 2001 through March 26, 2002 and (iv) 20%
thereafter. The CSFB Option is exercisable solely upon the occurrence of a
Liquidity Event at an exercise price of $14.56 per share and will expire on
September 27, 2011 or, if not exercised in full, upon consummation of the
Liquidity Event.
Restrictions on Transfer, Tag Along and Drag Along Provisions. Under the
Stockholders Agreement, the Other Holders are subject to customary restrictions
on transfer, obtained rights to participate in sales of stock by the other
parties to third parties, or "tag along" rights, and may be required to sell
their shares to third parties, or subject to "drag along" provisions. The
transfer restrictions (other than customary lockups in connection with
registered public offerings) expire upon a change of control or at such time
following the initial public offering that the outstanding shares of HF Holdings
have an aggregate market value of $200.0 million or more (a "Significant Public
Float"). The "tag along" and "drag along" rights expire upon the earlier of
(x) a change of control, (y) the date on which there shall exist a Significant
Public Float and (z) the initial public offering, if the managing underwriter
shall so determine. Non-CSFB Warrantholders' shares are freely transferable,
subject to securities law restrictions.
When any Bain Holder sells shares of common stock to third parties (other
than sales pursuant to the Junior Management and CSFB Options and customary
exceptions), the Other Holders have the right to include their shares on a pro
rata basis with the shares being sold by that Bain Holder, and
48
<PAGE>
under some circumstances, that Bain Holder can require the Other Holders to sell
their shares to the third party. The Other Holders also have pre-emptive rights
in the event of issuances of equity by HF Holdings to the Bain Holders. Subject
to customary limitations, the Other Holders have two (2) demand registration
rights (one of which is exercisable by CSFB and the other of which is
exercisable by Senior Management, in each case not earlier than 180 days
following the first registered secondary offering following an initial public
offering) and unlimited piggyback registration rights with respect to their
shares of common stock. Subject to customary limitations, the Bain Holders have
three demand registration rights and unlimited piggy back registration rights.
Subject to customary limitations, the Non-CSFB Warrantholders have two demand
registration rights, not earlier than 180 days following the first registered
secondary offering following an initial public offering, and unlimited piggyback
registration rights with respect to their shares of common stock. The
registration rights described herein will terminate as to any shares of HF
Holdings common stock when (a) they have been effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (b) they have been distributed to the public through a broker,
dealer or market maker pursuant to Rule 144 under the Securities Act or (c) the
holder of such shares may sell all of its shares under Rule 144 within a three
month period, provided such holder owns less than 1% of the outstanding shares
of common stock.
Management's tag along rights, drag along obligations and registration
rights (and interests in the LLC) are subject to a special rule such that, at
the option of Bain, up to 25% of Senior Management's and up to 15% of Junior
Management's entire position must be retained as equity rather than sold,
provided that, in the case of shares held by any particular manager (or some of
his or her transferees): (i) such manager is at such time employed by us or was
so employed at any time during the preceding 12 months, without any material
diminution of his or her responsibilities; and (ii) the buyer in connection with
such a sale is a financial buyer (as defined in the Stockholders Agreement).
Director Designations. Under the terms of the Stockholders Agreement,
HF Investment Holdings is entitled to appoint seven directors and CSFB is
entitled to appoint two directors. Upon liquidation of HF Investment Holdings,
the Bain Holders will be entitled to appoint five directors, CSFB will be
entitled to appoint two directors and Senior Management shall have the right to
be directors so long as they are employed by the company. So long as the Bain
Holders hold a significant percentage of the common stock of HF Holdings, the
Other Holders shall be required to vote in accordance with the Bain Holders on
significant corporate transactions.
THE LLC AGREEMENT. HF Investment Holdings is governed by a limited
liability company agreement among the Bain Affiliates, Senior Management, CSFB
and Bain designees (the "LLC Agreement"). The membership interests in
HF Investment Holdings consists of three classes: Class A Units, Class B Units
and Class C Units. Senior Management holds Class A Units, the Bain Affiliates
hold Class B Units and the Bain designees hold Class C Units.
The Class C units have no voting rights on any matters and Class A Units and
Class B Units have voting rights on all matters (including actions under the
Stockholders Agreement) subject to the following: (a) amendment of the LLC
Agreement requires approval of holders of a majority of units of each class; and
(b) holders of a majority of Class A Units are entitled to select two directors
and holders of a majority of Class B Units are entitled to select five
directors; in all other events, the Bain Affiliates shall have voting control
(subject to (a) and (b) above). The holders of any class of units may not
transfer their membership interests, except, in the case of management
stockholders, to a member of the holder's immediate family (or a trust for the
benefit of a family member) or charities or, in the case of institutional
holders, to specified affiliates.
The CSFB Warrant, which was issued under the LLC Agreement, is exercisable
for an aggregate of 50,000 Class C Units of the LLC at an exercise price of
$0.01 per Unit. The CSFB Warrant is exercisable solely upon the occurrence of a
Liquidity Event, and shall be deemed, subject to exceptions,
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to have been exercised upon the occurrence of an event of insolvency of HF
Holdings or one of its subsidiaries.
EMPLOYMENT AGREEMENTS. On September 27, 1999, we entered into new three
year employment agreements with each of Scott Watterson and Gary Stevenson.
These agreements are described under "Management--Employment Agreements."
MANAGEMENT LOANS. On September 27, 1999, HF Holdings loaned $1,209,340 to
Scott Watterson and $990,660 to Gary Stevenson against non-recourse notes with a
maturity of 10 years. The notes bear interest at a rate equal to that of the
revolver portion of the credit facilities, payable in cash until the earlier of
(i) the first date as of which the cumulative consolidated net taxable income of
HF Holdings and its subsidiaries (computed by disregarding deductions of HF
Holdings and its subsidiaries arising from events and transactions occurring
after the consummation of the September recapitalization) arising on or after
September 27, 1999 exceeds $0 or (ii) May 31, 2000, provided that the
consolidated EBITDA (as defined in the credit facilities) of our company and our
subsidiaries, for our fiscal year then ended, exceeds $64 million. The notes may
be accelerated upon specified defaults and liquidity events, and are secured by
(i) 666,700 shares of HF Holdings common stock and (ii) 5,131.39 Class A Units
of the LLC. HF Holdings has recourse only to such stock and Units. HF Holdings
also loaned $92,000 to S. Fred Beck, our Chief Financial Officer, and $100,000
to David J. Watterson, our Vice President, Marketing and Research and
Development.
MANAGEMENT AGREEMENTS. On September 27, 1999, our company and HF Holdings
also entered into a new management agreement with a Bain Affiliate which
provides, subject to restrictions contained in the credit facilities, for a fee
payable upon closing of the September recapitalization of $2,202,000 and an
annual management fee of $366,500 in exchange for management consulting services
including providing advice on strategic planning, development and acquisitions.
In addition, if we enter into any acquisition transactions involving at least
$10.0 million, the Bain Affiliate will receive (subject in some circumstances to
CSFB's fee described below) a fee in an amount which will approximate 1% of the
gross purchase price of the transaction (including assumed debt). We also paid
all arrearages under the existing Bain management agreement.
Additionally, HF Holdings entered into a management arrangement with CSFB
which provides, subject to restrictions contained in the credit facilities, for
a fee payable upon closing of the September recapitalization of $881,000 and an
annual management fee of $366,500 in exchange for consulting services. In
addition, if we enter into transactions which constitute a Liquidity Event, CSFB
will receive a fee in an amount which will approximate 50% of the fee payable
under the Bain management agreement in connection with such transaction.
On September 27, 1999, our company and HF Holdings also entered into
management agreements with each of Mr. Watterson and Mr. Stevenson which
provide, subject to restrictions contained in the credit facilities, for a
closing fee of $417,000 in the aggregate and, so long as the Bain Affiliate is
receiving a management fee under the Bain management agreement, an annual
management fee of $67,000 in the aggregate.
The respective management agreements include full indemnification and
expense reimbursement provisions in favor of Bain Capital, CFSB and their
affiliates and Senior Management, respectively.
AIRCRAFT LEASE
In June 1996, we entered into an agreement with FG Aviation, Inc. ("FG"), a
company which is jointly owned by our officers, whereby we have committed to
lease a Westwind II jet from FG. Minimum rentals under the lease, which expires
in May 2005, are $56,610 per month. In connection with its lease commitments, we
recorded $864,000, $679,000 and $679,000 of rental expense and $206,000, $34,000
and $0 of maintenance expense in the years ended May 31, 1999, 1998 and 1997. In
addition, we advanced $280,000 to FG as a security deposit on the aircraft
lease.
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THE EXCHANGE OFFER
As of the date of this prospectus, $44,282,000 aggregate principal amount of
unregistered notes are outstanding. Simultaneously with the September
recapitalization, we entered into an exchange and registration rights agreement
with the initial holders of the notes in which we agreed to deliver this
prospectus to you.
RESALE OF THE EXCHANGE NOTES
Based on no-action letters issued by the staff of the Securities and
Exchange Commission to third parties, we believe that a holder of old notes, but
not a holder who is an affiliate of our company within the meaning of Rule 405
of the Securities Act, who exchanges old notes for exchange notes in the
exchange offer, generally may offer the exchange notes for resale, sell the
exchange notes and otherwise transfer the exchange notes without further
registration under the Securities Act and without delivery of a prospectus that
satisfies the requirements of Section 10 of the Securities Act. This does not
apply, however, to a holder who is an affiliate of our company within the
meaning of Rule 405 of the Securities Act. We also believe that a holder may
offer, sell or transfer the exchange notes only if the holder acquires the
exchange notes in the ordinary course of its business and is not participating,
does not intend to participate and has no arrangement or understanding with any
person to participate in a distribution of the exchange notes.
Any holder of old notes using the exchange offer to participate in a
distribution of exchange notes cannot rely on the no-action letters referred to
above. This includes a broker-dealer that acquired old notes directly from us,
but not as a result of market-making activities or other trading activities.
Consequently, the holder must comply with the registration and prospectus
delivery requirements of the Securities Act in the absence of an exemption from
such requirements.
Each broker-dealer that receives exchange notes for its own account in
exchange for old notes, where such old notes were acquired by the broker-dealer
as a result of market-making activities or other trading activities may be a
statutory underwriter and must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with the resale of
exchange notes received in exchange for old notes. The letter of transmittal
which accompanies this prospectus states that by so acknowledging and by
delivering a prospectus, a participating broker-dealer will not be deemed to
admit that it is an underwriter within the meaning of the Securities Act. A
participating broker-dealer may use this prospectus, as it may be amended from
time to time, in connection with resales of exchange notes it receives in
exchange for old notes in the exchange offer. We will make this prospectus
available to any participating broker-dealer in connection with any resale of
this kind for a period of 30 days after the expiration date of the exchange
offer. See "Plan of Distribution".
Each holder of the old notes who wishes to exchange old notes for exchange
notes in the exchange offer will be required to represent and acknowledge, for
the holder and for each beneficial owner of such old notes, whether or not the
beneficial owner is the holder, in the letter of transmittal that:
- the exchange notes to be acquired by the holder and each beneficial owner,
if any, are being acquired in the ordinary course of business,
- neither the holder nor any beneficial owner is an affiliate, as defined in
Rule 405 of the Securities Act, of our company or any of our subsidiaries,
- any person participating in the exchange offer with the intention or
purpose of distributing exchange notes received in exchange for old notes,
including a broker-dealer that acquired old notes directly from us, but
not as a result of market-making activities or other trading activities
cannot rely on the no-action letters referenced above and must comply with
the registration and prospectus delivery requirements of the Securities
Act, in connection with a secondary resale of the exchange notes acquired
by such person,
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- if the holder is not a broker-dealer, the holder and each beneficial
owner, if any, are not participating, do not intend to participate and
have no arrangement or understanding with any person to participate in any
distribution of the exchange notes received in exchange for old notes, and
- if the holder is a broker-dealer that will receive exchange notes for the
holder's own account in exchange for old notes, the old notes to be so
exchanged were acquired by the holder as a result of market-making or
other trading activities and the holder will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of
such exchange notes received in the exchange offer. However, by so
representing and acknowledging and by delivering a prospectus, the holder
will not be deemed to admit that it is an underwriter within the meaning
of the Securities Act.
SHELF REGISTRATION STATEMENT
If applicable law or interpretations of the staff of the SEC are changed so
that the exchange notes received by holders who make all of the above
representations in the letter of transmittal are not or would not be, upon
receipt, transferable by each such holder without restriction under the
Securities Act, our company and the subsidiary guarantors will, at their cost:
- file a shelf registration statement covering resales of the old notes,
- use their respective best efforts to cause the shelf registration
statement to be declared effective under the Securities Act at the
earliest possible time, but no later than the later of 120 days after the
filing of the shelf registration statement and March 27, 2000, and
- use their respective best efforts to keep effective the shelf registration
statement until the earlier of September 27, 2001 or the time when all of
the applicable old notes are no longer outstanding.
We will, if and when we file the shelf registration statement, provide to
each holder of the old notes copies of the prospectus which is a part of the
shelf registration statement, notify each holder when the shelf registration
statement has become effective and take other actions as are required to permit
unrestricted resales of the old notes. A holder that sells old notes pursuant to
the shelf registration statement generally must be named as a selling
security-holder in the related prospectus and must deliver a prospectus to
purchasers, will be subject to civil liability provisions under the Securities
Act in connection with these sales and will be bound by the provisions of the
exchange and registration rights agreement which are applicable to the holder,
including indemnification obligations. In addition, each holder of old notes
must deliver information to be used in connection with the shelf registration
statement and provide comments on the shelf registration statement in order to
have its old notes included in the shelf registration statement and benefit from
the provisions regarding any liquidated damages described below.
TERMS OF THE EXCHANGE OFFER
Upon the exchange offer registration statement being declared effective, we
will offer the exchange notes in exchange for surrender of the old notes. We
will keep the exchange offer open for at least 30 days, or longer if required by
applicable law, after the date notice of the exchange offer is mailed to the
holders of the old notes.
Upon the terms and subject to the conditions contained in this prospectus
and in the letter of transmittal which accompanies this prospectus, we will
accept any and all old notes validly tendered and not withdrawn before midnight,
New York City time, on the expiration date of the exchange offer. We will issue
an equal principal amount of exchange notes in exchange for the principal amount
of old
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notes accepted in the exchange offer. Holders may tender some or all of their
old notes under the exchange offer. Old notes may be tendered only in integral
multiples of $1,000.
The form and terms of the exchange notes will be the same as the form and
terms of the old notes except that:
(1) the exchange notes will have been registered under the Securities Act
and therefore will not bear legends restricting their transfer, and
(2) the exchange notes will not contain terms providing for an increase in
the interest rate on the old notes under specific circumstances which are
described in the exchange and registration rights agreement.
The exchange notes will evidence the same debt as the old notes and will be
entitled to the benefits of the indenture governing the old notes.
In connection with the exchange offer, holders of old notes do not have any
appraisal or dissenters' rights under law or the indenture governing the old
notes. We intend to conduct the exchange offer in accordance with the applicable
requirements of the Securities Exchange Act of 1934 and the rules and
regulations of the Securities and Exchange Commission related to such offers.
We will be deemed to have accepted validly tendered old notes when, as and
if we have given oral or written notice of acceptance to The Bank of New York,
exchange agent for the exchange offer. The exchange agent will act as agent for
the tendering holders for the purpose of receiving the exchange notes from us.
If any tendered old notes are not accepted for exchange because of an
invalid tender, the occurrence of other events specified in this prospectus or
if old notes are submitted for a greater principal amount than the holder
desires to exchange, the certificates for the unaccepted old notes will be
returned without expense to the tendering holder. If old notes were tendered by
book-entry transfer in the exchange agent account at The Depository Trust
Company in accordance with the book-entry transfer procedures described below,
these non-exchanged old notes will be credited to an account maintained with The
Depository Trust Company as promptly as practicable after the expiration date of
the exchange offer.
We will pay all charges and expenses, other than transfer taxes in some
circumstances, in connection with the exchange offer. See "--Fees and Expenses."
Holders who tender old notes in the exchange offer will therefore not need to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes in the
exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date of the exchange offer is midnight, New York City time,
on , 2000, unless we, in our sole discretion, extend the exchange offer,
in which case the expiration date shall be the latest date and time to which the
exchange offer is extended.
We reserve the right, in our sole discretion to amend the terms of the
exchange offer in any manner.
We will give oral or written notice of any extension, delay, non-acceptance,
termination or amendment as promptly as practicable by a public announcement,
and in the case of an extension, no later than 9:00 a.m., New York City time, on
the business day after the previously scheduled expiration date.
During an extension, all notes previously tendered will remain subject to
the exchange offer and may be accepted for exchange by us. Any old notes not
accepted for exchange for any reason will be
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returned without cost to the holder that tendered them as promptly as
practicable after the expiration or termination of the exchange offer.
PROCEDURES FOR TENDERING
To tender in the exchange offer, you must do the following:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal,
- have the signatures thereon guaranteed if required by the letter of
transmittal, and
- except as discussed in "--Guaranteed Delivery Procedures," mail or
otherwise deliver the letter of transmittal, or facsimile, together with
the old notes and any other required documents, to the exchange agent
prior to midnight, New York City time, on the expiration date of the
exchange offer.
The exchange agent must receive the old notes, a completed letter of
transmittal and all other required documents at the address listed below under
"--Exchange Agent" before midnight, New York City time, on the expiration date
for the tender to be effective. You may deliver your old notes by using the
book-entry transfer procedures described below, as long as the exchange agent
receives confirmation of the book-entry transfer before the expiration date.
The Depository Trust Company has authorized its participants that hold old
notes on behalf of beneficial owners of old notes through The Depository Trust
Company to tender their old notes as if they were holders. To effect a tender of
old notes, The Depository Trust Company participants should either:
(1) complete and sign the letter of transmittal (or a manually signed
facsimile of the letter), have the signature thereon guaranteed if
required by the instructions to the letter of transmittal, and mail or
deliver the letter of transmittal (or the manually signed facsimile) to
the exchange agent according to the procedure described in "Procedures
for Tendering" or
(2) transmit their acceptance to The Depository Trust Company through its
automated tender offer program for which the transaction will be eligible
and follow the procedure for book-entry transfer its described in
"--Book-Entry Transfer."
By tendering, each holder will make the representations contained in the
fourth paragraph above under the heading "--Resale of the Exchange Notes." Each
participating broker-dealer must acknowledge that it will deliver a prospectus
in connection with any resale of such exchange notes. See "Plan of
Distribution."
The tender by a holder and the acceptance of the tender by us will
constitute the agreement between the holder and our company set forth in this
prospectus and in the letter of transmittal.
The method of delivery of old notes and the letter of transmittal and all
other required documents to the exchange agent is at the election and sole risk
of the holder. As an alternative to delivery by mail, holders may wish to
consider overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. No letter of transmittal or old notes or book-entry confirmation should be
sent to us. Holders may request their respective brokers, dealers, commercial
banks, trust companies or nominees to effect the above transactions on their
behalf.
Any beneficial owner whose old notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct it to tender on the
beneficial owner's behalf. See "Instructions to Registered Holder and/or
Book-Entry Transfer Facility Participant from Beneficial Owner" included with
the letter of transmittal. If the beneficial owner wishes to tender on his own
behalf, such owner must, prior to
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completing and executing the letter of transmittal and delivering such
beneficial owner's old notes, either make appropriate arrangements to register
ownership of the old notes in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer of registered ownership may
take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible guarantor institution (within the meaning of
Rule 17Ad-5 under the Exchange Act of 1934) unless the old notes are tendered:
- by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter of
transmittal, or
- for the account of an eligible guarantor institution.
If signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, the guarantee must be by a member
firm of a registered national securities exchange or of the National Association
of Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an eligible guarantor institution.
If a letter of transmittal is signed by a person other than the registered
holder of any old notes listed in the letter of transmittal, the old notes must
be endorsed or accompanied by a properly completed bond power and signed by the
registered holder as the registered holder's name appears on the old notes.
If a letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by us, evidence
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal.
Promptly after the date of this prospectus, the exchange agent will
establish a new account or utilize an existing account with respect to the old
notes at the book-entry transfer facility, The Depository Trust Company, for the
purpose of facilitating the exchange offer. Subject to the establishment of the
accounts, any financial institution that is a participant in the book-entry
transfer facility's system may make book-entry delivery of old notes by causing
the book-entry transfer facility to transfer the old notes into the exchange
agent's account with respect to the old notes in accordance with that facility's
procedures. Although delivery of the old notes may be effected through
book-entry transfer into the exchange agent's account at the book-entry transfer
facility, an appropriate letter of transmittal properly completed and duly
executed or an agent's message with any required signature guarantee and all
other required documents the exchange agent at its address listed below on or
before the expiration date of the exchange offer, or, if the guaranteed delivery
procedures described below are complied with, within the time period provided
under such procedures. Delivery of documents to the book-entry transfer facility
does not constitute delivery to the exchange agent.
The term "agent's message" means a message transmitted by The Depository
Trust Company to, and received by, the exchange agent, which states that The
Depository Trust Company has received an express acknowledgment from the
participant in The Depository Trust Company tendering the old notes stating:
- the aggregate principal amount of old notes which have been tendered by
such participant,
- that such participant has received and agrees to be bound by the term of
the letter of transmittal and
- that we may enforce such agreement against the participant.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered old notes and withdrawal of tendered old notes
will be determined by us in our sole discretion, which
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determination will be final and binding. We reserve the absolute right to reject
any and all old notes not properly tendered or any old notes our acceptance of
which would, in the opinion of our counsel, be unlawful. We also reserve the
right to waive any defects, irregularities or conditions of tender as to
particular old notes. Our interpretation of the terms and conditions of the
exchange offer, including the instructions in the letter of transmittal, will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of old notes must be cured within a period of time
that we shall determine. Neither our company, the exchange agent nor any other
person shall incur any liability for failure to give notice of any defect or
irregularity with respect to any tender of old notes. Tenders of old notes will
not be deemed to have been made until such defects or irregularities mentioned
above have been cured or waived. Any old notes received by the exchange agent
that are not properly tendered and as to which the defects or irregularities
have not been cured or waived will be returned by the exchange agent to the
tendering holders, unless otherwise provided in the letter of transmittal, as
soon as practicable following the expiration date of the exchange offer.
GUARANTEED DELIVERY PROCEDURES
A holder who wishes to tender its old notes and:
- whose old notes are not immediately available,
- who cannot deliver the holder's old notes, the letter of transmittal or
any other required documents to the exchange agent prior to the expiration
date, or
- who cannot complete the procedures for book-entry transfer, before the
expiration date,
may effect a tender if:
- the tender is made through an eligible guarantor institution,
- before the expiration date, the exchange agent receives from the eligible
guarantor institution a properly completed and duly executed notice of
guaranteed delivery by facsimile transmission, mail or hand delivery, the
name and address of the holder, the certificate number(s) of the old notes
and the principal amount of old notes tendered, stating that the tender is
being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the expiration date, the letter of transmittal
(or facsimiles thereof) together with the certificate(s) representing the
old notes (or a confirmation of book-entry transfer of the old notes into
the exchange agent's account at the book-entry transfer facility), and any
other documents required by the letter of transmittal will be deposited by
the eligible guarantor institution with the exchange agent, and
- the exchange agent receives, within three New York Stock Exchange trading
days after the expiration date, a properly completed and executed letter
of transmittal or facsimile, as well as the certificate(s) representing
all tendered old notes in proper form for transfer or a confirmation of
book-entry transfer of such old notes into the exchange agent's account at
the book-entry transfer facility, and all other documents required by the
letter of transmittal.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of old notes may be
withdrawn at any time prior to midnight, New York City time, on the expiration
date of the exchange offer.
To withdraw a tender of old notes in the exchange offer, a letter or
facsimile transmission notice of withdrawal must be received by the trustee at
its address set forth below prior to midnight, New York City time, on the
expiration date. Any notice of withdrawal must:
- specify the name of the person having deposited the old notes to be
withdrawn,
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- identify the old notes to be withdrawn including the certificate number(s)
and principal amount of such old notes or, in the case of old notes
transferred by book-entry transfer, the name and number of the account at
the book-entry transfer facility to be credited and otherwise comply with
the procedures of the transfer agent,
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the old notes were tendered, including
any required signature guarantees, or be accompanied by documents of
transfer sufficient to have the trustee under the indenture governing the
old notes register the transfer of the old notes into the name of the
person withdrawing the tender, and
- specify the name in which any such old notes are to be registered, if
different from that of the person who deposited the notes.
If certificates for old notes have been delivered or otherwise identified to
the exchange agent, then, before the release of the certificates, the
withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an eligible guarantor institution unless the holder is an eligible
guarantor institution.
All questions as to the validity, form and eligibility, including time of
receipt, of such notices will be determined by us, and our determination shall
be final and binding on all parties. Any old notes so withdrawn will be deemed
not to have been validly tendered for purposes of the exchange offer, and no
exchange notes will be issued, unless the old notes so withdrawn are validly
retendered. Any old notes which have been tendered but which are not accepted
for exchange will be returned to the holder of the notes without cost to the
holder as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn old notes may be
retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time before the expiration date.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. Questions and requests for assistance and requests for additional copies
of this prospectus or of the letter of transmittal should be directed to The
Bank of New York addressed as follows:
For Information by Telephone: (212) 815-3687
By Overnight Delivery Service or Registered/Certified Mail:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attn.: Reorganization Unit-7E
By Hand
The Bank of New York
101 Barclay Street
Ground Level Corporate Trust Services Window
New York, New York 10286
Attn.: Reorganization Unit-7E
By Facsimile Transmission:
(212) 815-6339
Telephone Confirmation to Ayikwei Aryeetey:
(212) 815-3687
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The Bank of New York also acts as trustee under the indenture governing the
notes as successor to IBJ Whitehall Bank & Trust Company.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. We have not retained any
dealer-manager in connection with the exchange offer and will not make any
payments to brokers, dealers or others soliciting acceptances of the exchange
offer. However, we will pay the exchange agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses in
connection with providing the services.
The cash expenses to be incurred in connection with the exchange offer will
be paid by us. Such expenses include fees and expenses of The Bank of New York
as exchange agent and as trustee under the indenture governing the notes,
accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the old
notes as reflected in our accounting records on the date of exchange.
Accordingly, we will not recognize any gain or loss for accounting purposes. The
expenses of the exchange offer and the unamortized expenses related to the
issuance of the old notes will be amortized over the term of the notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of old notes who are eligible to participate in the exchange offer
but who do not tender their old notes will not have any further registration
rights, and their old notes will continue to be subject to restrictions on
transfer. Accordingly, such old notes may be resold only:
- to us, upon redemption of these notes or otherwise,
- so long as the old notes are eligible for resale pursuant to Rule 144A
under the Securities Act, to a person inside the United States whom the
seller reasonably believes is a qualified institutional buyer within the
meaning of Rule 144A in a transaction meeting the requirements of
Rule 144A,
- in accordance with Rule 144 under the Securities Act, or under another
exemption from the registration requirements of the Securities Act, and
based upon an opinion of counsel reasonably acceptable to us,
- outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, or
- under an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any state of
the United States.
REGULATORY APPROVALS
We do not believe that the receipt of any material federal or state
regulatory approval will be necessary in connection with the exchange offer,
other than the effectiveness of the exchange offer registration statement under
the Securities Act.
OTHER
Participation in the exchange offer is voluntary and holders of old notes
should carefully consider whether to accept the terms and condition of this
offer. Holders of the old notes are urged to consult their financial and tax
advisors in making their own decisions on what action to take with respect to
the exchange offer.
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DESCRIPTION OF THE NOTES
The exchange notes, like the old notes, will be issued under the indenture,
dated September 27, 1999 among ICON, the Subsidiary Guarantors named therein and
The Bank of New York, as successor to IBJ Whitehall Bank & Trust Company, as
trustee. The exchange notes are the same as the old notes except that the
exchange notes
- will not bear legends restricting their transfer and
- will not contain certain terms providing for an increase in the interest
rate under the circumstances described in the registration rights
agreement.
The indenture and its associated documents contain the full legal text of
the matters described in this section. A copy of the indenture has been filed
with the Securities and Exchange Commission as part of our Registration
Statement. See "Where You Can Find More Information" on page 106 for information
on how to obtain a copy.
Because this section is a summary, it does not describe every aspect of the
notes. This summary is subject to and qualified in its entirety by reference to
all the provisions of the indenture, including definitions of some terms used in
the indenture. For example, in this section we use capitalized words to signify
defined terms that have been given special meaning in the indenture. We describe
the meaning for only the more important terms, under "Definitions". We also
include references in parentheses to sections of the indenture. Whenever we
refer to particular sections or defined terms of the indenture in this
prospectus, these sections or defined terms are incorporated by reference into
this prospectus.
For the purpose of this summary, the term "Notes" means the exchange notes
offered by this prospectus and the old notes issued on September 27, 1999 in
connection with the September recapitalization. The term "ICON" refers to ICON
Health & Fitness, Inc. and does not include its subsidiaries except for purposes
of financial data determined on a consolidated basis.
BRIEF DESCRIPTION OF THE NOTES AND THE SUBSIDIARY GUARANTEES
The Notes:
- will be general unsecured obligations of ICON;
- will be subordinated in right of payment to all existing and future Senior
Indebtedness of ICON (i.e., Indebtedness outstanding under the credit
facilities);
- will be effectively subordinated to all secured obligations to the extent
of the assets securing such obligations, including the credit facilities;
- will be effectively subordinated in the right of payment to all existing
and future liabilities of any ICON subsidiaries which do not guarantee the
Notes, including its foreign subsidiaries; and
- will be guaranteed by each domestic subsidiary of ICON.
The Subsidiary Guarantees of the Notes:
- will be general unsecured obligations of each Subsidiary Guarantor;
- will be subordinated in right of payment to all existing and future Senior
Indebtedness of each Subsidiary Guarantor (i.e., Indebtedness outstanding
under its guarantee if the credit facilities); and
- will be effectively subordinated to all secured obligations of the
Subsidiary Guarantors to the extent of the assets securing such
obligations, including the new credit facility.
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At the date of this exchange offer, all of ICON's subsidiaries will be
Restricted Subsidiaries. However, under circumstances described under the
caption "--Certain Covenants--Limitation on Designation of Unrestricted
Subsidiaries," ICON will be able to designate current or future subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to any
of the restrictive covenants set forth in the indenture. ICON's Unrestricted
Subsidiaries will not guarantee the Notes.
PRINCIPAL, MATURITY AND INTEREST
The indenture provides that ICON may issue Notes with a maximum aggregate
principal amount of $45.0 million, of which $44.282 million is outstanding. ICON
will issue Notes in denominations of $1,000 and integral multiples of $1,000.
The Notes will mature on September 27, 2005. Interest on the Notes will
accrue at the rate of 12% per annum and will be payable semi-annually in arrears
on January 15 and July 15, to Holders of record on the immediately preceding
January 1 and July 1.
Interest on the Notes will accrue from the date of original issuance.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
All payments on Notes will be made at the office or agency of ICON
maintained for such purpose (which may be an office of the Trustee or an
affiliate of the Trustee, registrar or co-registrars) within the Borough of
Manhattan, City and State of New York, unless ICON elects to make interest
payments by (1) check mailed to the Holders or (2) to an account maintained by
the Holders in the United States. (SectionSection3.9, 10.2)
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the indenture.
The Registrar, Trustee and ICON may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and ICON may require a
Holder to pay any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange.
The registered Holder of a note will be treated as the owner of it for all
purposes. (SectionSection3.5, 3.7)
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes will
be subordinated in right of payment, as set forth in the indenture, to the prior
payment in full, in cash or, at the option of holders of Senior Indebtedness,
cash equivalents, of all amounts payable under Senior Indebtedness of ICON,
i.e., indebtedness under the credit facility. (Section13.1)
The indenture provides that ICON may not make any payment upon or in respect
of the Notes if:
(1) a payment default by ICON of the principal of, premium, if any, or
interest on Senior Indebtedness occurs; or
(2) any other default occurs on any Specified Senior Indebtedness that
permits holders of that Specified Senior Indebtedness to accelerate its
maturity. (Section13.2)
The indenture also provides that upon any payment or distribution of assets
or securities of ICON upon any:
(1) distribution to creditors of ICON in a liquidation or dissolution of
ICON, or
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(2) bankruptcy, reorganization, insolvency, receivership or similar
proceeding of ICON (whether voluntary or involuntary), or
(3) assignment for the benefit of creditors or any marshaling of the assets
and liabilities of ICON,
the holders of Senior Indebtedness will be entitled to receive payment in full
of all amounts due in respect of all Senior Indebtedness before the Holders or
the Trustee on their behalf will be entitled to receive any payment by ICON on
or in respect of the Notes or any payment to acquire any of the Notes for cash,
property or securities, or any distribution with respect to the Notes of any
cash, property or securities. However, Holders may receive:
(1) securities that are subordinated to at least the same extent as the
Notes to (a) Senior Indebtedness and (b) any securities issued in
exchange for Senior Indebtedness; and
(2) payments and other distributions made from any defeasance trust created
pursuant to the provisions described under the caption "--Defeasance and
Covenant Defeasance--Conditions to Defeasance or Covenant Defeasance".
(Section13.3)
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of ICON who are holders of Senior Indebtedness. The indenture limits,
subject to financial tests, the amount of additional indebtedness, including
Senior Indebtedness, that ICON and its Restricted Subsidiaries can incur. See
"--Certain Covenants--Limitation on Indebtedness and Issuance of Preferred
Stock."
SUBSIDIARY GUARANTEES
The Subsidiary Guarantors will jointly and severally guarantee the payment
obligations of ICON under the Notes. The Subsidiary Guarantee of each Subsidiary
Guarantor is unsecured and is subordinated to the prior payment in full in cash,
or cash equivalent, of all Senior Indebtedness of such Subsidiary Guarantor,
i.e., its guarantee of the new credit facility. The obligations of each
Subsidiary Guarantor under its Subsidiary Guarantee will be limited as necessary
to prevent that Subsidiary Guarantee from constituting a fraudulent conveyance
under applicable law. (SectionSection14.1, 14.2)
MERGER OF SUBSIDIARY GUARANTORS
A Subsidiary Guarantor may not in a single transaction or a series of
related transactions consolidate with or merge with or into (whether or not such
Subsidiary Guarantor is the surviving Person) or, sell, assign, convey,
transfer, lease or otherwise dispose of all or substantially all of its
properties, to any other Person or group of affiliated Persons, other than in
the case of a Merger with or into ICON or another Subsidiary Guarantor but
subject to the releases described below, unless:
(1) the Person formed by or surviving any such consolidation or merger (if
other than such Subsidiary Guarantor) expressly assumes all the
obligations of such Subsidiary Guarantor under the Notes, the indenture
and the Subsidiary Guarantee pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee; and
(2) immediately after giving effect to such transaction or series of
transactions, no Default or Event of Default has occurred or is
continuing. (Section14.4)
The indenture provides that the Subsidiary Guarantee of a Subsidiary
Guarantor will be released:
(1) in connection with any sale or disposition of all or substantially all
of the assets of that Subsidiary Guarantor, (including by way of merger
or consolidation), if the disposition is to ICON or another Subsidiary
Guarantor or, if ICON applies the Net Proceeds of that sale or other
disposition in accordance with the applicable provisions of the
indenture, including the
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covenant described under the caption "--Repurchase at the Option of
Holders--Asset Sales"; or
(2) in connection with any sale of all of the capital stock of a Subsidiary
Guarantor, if ICON applies the Net Proceeds of that sale in accordance
with the applicable provisions of the indenture, including the covenant
described under the caption "--Repurchase at the Option of Holders--Asset
Sales"; or
(3) if ICON designates any Restricted Subsidiary that is a Subsidiary
Guarantor as an Unrestricted Subsidiary; or
(4) upon the release or discharge of all guarantees of such Subsidiary
Guarantor, and all pledges of property or assets of such Subsidiary
Guarantor securing all other Indebtedness of ICON and the other
Subsidiary Guarantors. (Section14.5)
REDEMPTION
OPTIONAL REDEMPTION
ICON may redeem all but not part of the Notes at any time after issuance
upon not less than 30 nor more than 60 days notice at the following redemption
prices (expressed in percentages of principal amount thereof), plus accrued and
unpaid interest and Liquidated Damages, if any, to the redemption date if
redeemed during the 12 month period ending February 15 of each of the years set
forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
Issue Date through 2001..................................... 101%
2002........................................................ 102%
2003........................................................ 104%
2004........................................................ 102%
2005........................................................ 101%
Thereafter.................................................. 100%
</TABLE>
Notice of redemption will be given by ICON or, at its request, by the
Trustee in the name of ICON and at its expense, not less than 30 nor more than
60 days prior to the redemption date, to each Holder of Notes to be redeemed.
(SectionSection11.1, 11.5)
MANDATORY REDEMPTION
ICON is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL (Section10.15)
If a Change of Control occurs, ICON will be required to make an offer to
each Holder of Notes to purchase all of the then outstanding Notes and purchase
all of the Outstanding Notes validly tendered pursuant to the offer. The
purchase price will be in cash equal to 101% of the aggregate principal amount
of the Notes plus accrued and unpaid interest and Liquidated Damages, if any, to
the purchase date.
ICON will not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth under the
provisions of this covenant and all other provisions of the indenture applicable
to a Change of Control Offer made by ICON and purchases all Notes validly
tendered and not withdrawn under such Change of Control Offer.
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ICON's outstanding Senior Indebtedness prohibits it from purchasing any
Notes, and also provides that change of control events with respect to ICON
constitute a default under the agreements governing the Senior Indebtedness. Any
future credit agreements or other agreements relating to Senior Indebtedness to
which ICON becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when ICON is prohibited from
purchasing Notes, ICON could seek the consent of its senior lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If ICON does not obtain such a consent or repay such borrowings,
ICON will remain prohibited from purchasing Notes. In such case, ICON's failure
to purchase tendered Notes will constitute an Event of Default under the
indenture which will, in turn, constitute a default under such Senior
Indebtedness. In such circumstances, the subordination provisions in the
indenture will likely restrict payments to the Holders of Notes.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of ICON and its Restricted Subsidiaries taken as a whole. Although
there is a limited body of case law interpreting the phrase "substantially all,"
there is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a Holder of Notes to require ICON to repurchase such
Notes as a result of a sale, lease, transfer, conveyance or other disposition of
less than all of the assets of ICON and its Restricted Subsidiaries taken as a
whole to another Person or groups may be uncertain.
ASSET SALES (Section10.17)
ICON will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, consummate an Asset Sale unless:
(1) at least 75% of the proceeds from such Asset Sale is received in the
form of cash or assumed liabilities; and
(2) ICON, or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the Fair
Market Value of the Capital Stock or assets issued or sold or otherwise
disposed of.
Within one year after the receipt of the proceeds from an Asset Sale, ICON
or any of its Restricted Subsidiaries, may use such Net Cash Proceeds, at its
option:
(1) to repay or prepay permanently any then outstanding Senior Indebtedness
of ICON or any of its Restricted Subsidiaries; or
(2) to invest in properties and assets to replace the properties and assets
subject to the Asset Sale, or in properties and assets to be used in a
Permitted Business. Pending the making of any such investment, ICON may
use such Net Cash Proceeds to temporarily reduce the amount of
outstanding Indebtedness under the Credit Agreement and such reduction
will constitute such a segregation as referred to in the immediately
preceding sentence.
When the aggregate amount of Excess Proceeds exceeds $5.0 million, ICON will
be required to make an offer to purchase ("Excess Proceeds Offer") from all
Holders, on a PRO RATA basis, the maximum principal amount of Notes that may be
purchased with the Excess Proceeds. The offer price as to each Note will be
payable in cash in an amount equal to 100% of the principal amount of such Notes
plus accrued and unpaid interest and Liquidated Damages, if any, to the date
such Excess Proceeds Offer is consummated. To the extent that the aggregate
principal amount of Notes tendered pursuant to an Excess Proceeds Offer is less
than the Excess Proceeds, ICON, or the applicable Restricted Subsidiary, may use
such deficiency for general corporate purposes. If the aggregate principal
amount of Notes validly tendered and not withdrawn by holders thereof exceeds
the Excess Proceeds, the Notes to be purchased will be selected on a PRO RATA
basis. Upon completion of any such offer to purchase, the amount of Excess
Proceeds will be reset to zero.
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Notwithstanding the foregoing, if ICON or any Restricted Subsidiaries incurs
Indebtedness (in compliance with the covenant described under the caption
"--Certain Covenants--Limitation on Indebtedness and Issuance of Preferred
Stock") for the purpose of purchasing assets, and such assets are then sold in a
Sale and Leaseback Transaction, the proceeds of such Sale and Leaseback
Transaction may be used to repay such Indebtedness and, if so applied, will not
constitute "Excess Proceeds."
If ICON becomes obligated to make an Excess Proceeds Offer, ICON will
purchase the Notes on a date that is not earlier than 45 days and not later than
60 days from the date the notice is given to Holders, or such later date as may
be necessary to comply with the requirements under the Exchange Act.
CERTAIN COVENANTS
PROVISION OF FINANCIAL STATEMENTS (Section10.9)
Whether or not ICON is subject to Section 13(a) or 15(d) of the Exchange
Act, ICON will prepare and, unless the SEC does not accept such filing, file
with the SEC the annual reports, quarterly reports and other documents which
ICON would have been required to file with the SEC pursuant to such
Section 13(a) or 15(d) if ICON were so subject. The documents to be filed with
the SEC include a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report by certified independent accountants of ICON, on or prior to the
respective dates (the "Required Filing Dates") by which ICON would have been
required to file such documents if ICON were so subject. ICON will also in any
event:
(1) within 15 days of each Required Filing Date
(a) transmit by mail to all Holders; and
(b) file with the Trustee copies of the annual reports, quarterly reports
and other documents which ICON has filed with the SEC or would have
been required to file with the SEC pursuant to Section 13(a) or 15(d)
of the Exchange Act if ICON were subject to such Section, and
(2) if filing such documents by ICON with the SEC is not permitted under the
Exchange Act, promptly upon written request of any Holder or prospective
Holder, supply copies of such documents to any Holder or prospective
Holder or other Person at the cost of ICON.
If any Guarantor's financial statements would be required to be included in
the financial statements filed or delivered pursuant hereto if ICON were subject
to Section 13(a) or 15(d) of the Exchange Act, ICON will include such financial
statements in any filing or delivery pursuant to this covenant.
For so long as any Notes remain outstanding, ICON and the Subsidiary
Guarantors will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144(d)(4) under the Securities Act.
LIMITATION ON INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK (Section10.10)
ICON will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur"), any Indebtedness (including Acquired Indebtedness),
other than Permitted Indebtedness, and ICON will not issue any Redeemable Stock
and will not permit any of its Restricted Subsidiaries to issue any shares of
Preferred Stock. However, ICON and any
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Subsidiary Guarantor may incur Indebtedness (including Acquired Indebtedness) or
issue Redeemable Stock, and any Subsidiary Guarantor may issue Preferred Stock,
if:
(1) ICON's Consolidated Fixed Charge Coverage Ratio for the four full fiscal
quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is
incurred or Preferred Stock is issued taken as one period, and after
giving PRO FORMA effect to:
(a) the incurrence of such Indebtedness or issuance of such Redeemable
Stock or Preferred Stock and (if applicable) the application of the
net proceeds therefrom, including the refinancing of other
Indebtedness or Redeemable Stock or Preferred Stock, as if such
Indebtedness was incurred or Redeemable Stock or Preferred Stock was
issued, and the application of such proceeds occurred, on the first
day of such four-quarter period;
(b) the incurrence, repayment or retirement of any other Indebtedness by
ICON and its Subsidiary Guarantors, or issuance or redemption of
Redeemable Stock or Preferred Stock, since the first day of such
four-quarter period, as if such Indebtedness was incurred, repaid or
retired, Redeemable Stock or Preferred Stock was issued or redeemed,
on the first day of such four-quarter period; and
(c) notwithstanding clause (3) of the definition of "Consolidated
Adjusted Net Income", any acquisition or disposition by ICON or any
of its Restricted Subsidiary of any company, entity or any business,
in each case since the first day of such four-quarter period, as if
such acquisition or disposition had occurred on the first day of such
four-quarter period, would have been at least equal (A) 2.25:1.0 for
the period from the date of the indenture through January 31, 2001
and (B) 2.50:1.0 for all periods thereafter;
(2) such Indebtedness is unsecured and is expressly subordinate in right of
payment to the Notes and
(3) the Weighted Average Life to Maturity of such Indebtedness or Redeemable
Stock is greater than the remaining Weighted Average Life to Maturity of
the Notes.
Notwithstanding the foregoing, ICON will not, and will not permit any
Subsidiary to incur Indebtedness or issue any shares of Preferred Stock of such
Subsidiary, directly or indirectly, in exchange for or upon the conversion of
any Indebtedness of IHF Holdings or ICON Fitness unless such Indebtedness is
unsecured and is expressly subordinate in right of payment to the Notes.
LIMITATION ON RESTRICTED PAYMENTS (Section10.11)
ICON will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution on
account of ICON's or any of its Restricted Subsidiaries' Capital Stock
(including any payment in connection with any merger or consolidation
involving ICON or any of its Restricted Subsidiaries) or to the direct or
indirect holders of, any shares of Capital Stock of ICON or any
Restricted Subsidiary (other than dividends or distributions payable
solely in shares of Capital Stock of ICON or in options, warrants or
other rights to purchase such Capital Stock but excluding dividends or
distributions payable in Redeemable Capital Stock or in options, warrants
or other rights to purchase Redeemable Capital Stock and other than to
ICON or one of its Restricted Subsidiaries);
(2) purchase, redeem or otherwise acquire or retire for value, directly or
indirectly, any shares of the Capital Stock of ICON or any direct or
indirect parent of ICON or any of its Restricted Subsidiary or any
Affiliate thereof or any options, warrants or other rights to acquire
such Capital Stock, held by a Person other than ICON or any of its
Restricted Subsidiaries (other
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than such a purchase, redemption or acquisition of Capital Stock of a
Restricted Subsidiary as a result of which such Restricted Subsidiary
becomes a Wholly Owned Restricted Subsidiary);
(3) make any payment on or with respect to, or repurchase, redeem, defease
or otherwise acquire or retire for value, prior to a scheduled principal
payment, interest payment, scheduled sinking fund payment or maturity,
any Subordinated Indebtedness or Indebtedness that ranks pari passu with
the Notes;
(4) make any payment on or with respect to, or purchase or repurchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness
of IHF Holdings or ICON Fitness;
(5) incur any guarantee of Indebtedness of any Affiliates of ICON or any of
its Restricted Subsidiaries (other than with respect to (1) guarantees of
Indebtedness of any Restricted Subsidiary by ICON or (2) guarantees of
Indebtedness of ICON or any Restricted Subsidiary by any Restricted
Subsidiary); or
(6) make any Investment (other than any Permitted Investment) in any Person
(all such payments described in clauses (1) through (6) above and not excepted
therefrom are collectively referred to herein as "Restricted Payments"), unless
at the time of and immediately after giving effect to the proposed Restricted
Payment:
(1) no Default or Event of Default has occurred and is continuing or would
occur as a consequence thereof;
(2) ICON could, at the time of such Restricted Payment and after giving pro
forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, have been permitted to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the covenant described under the caption
"--Limitation on Indebtedness and Issuance of Preferred Stock"; and
(3) the aggregate amount of all such Restricted Payments declared or made
after the date of the indenture does not exceed the sum of:
(a) 50% of the aggregate cumulative Consolidated Adjusted Net Income of
ICON accrued on a cumulative basis during the period beginning on the
first day of the month commencing immediately after the date of the
indenture and ending on the last day of its last fiscal quarter
ending prior to the date of such proposed Restricted Payment (or, if
such aggregate cumulative Consolidated Adjusted Net Income shall be a
loss, minus 100% of such loss);
(b) the aggregate net cash proceeds received after the date of the
indenture by ICON from the issuance or sale (other than to any of its
Restricted Subsidiaries) of shares of Capital Stock of ICON (other
than Redeemable Capital Stock) or any options, warrants or rights to
purchase shares of such Capital Stock;
(c) the aggregate net cash proceeds received after the date of the
indenture by ICON from the issuance or sale of debt securities (other
than to any Restricted Subsidiary) that have been converted into or
exchanged for Capital Stock of ICON (other than Redeemable Capital
Stock) to the extent such debt securities were originally sold for
cash, together with the aggregate of any additional net cash proceeds
received by ICON at the time of such conversion or exchange;
(d) the aggregate net cash proceeds received after the date of the
indenture by ICON as capital contributions (other than from any of
its Restricted Subsidiaries);
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(e) to the extent that any Investment (other than a Permitted Investment)
that was made after the date of the indenture is sold for cash or
otherwise liquidated or repaid for cash, the lesser of (x) the cash
return of capital with respect to such Restricted Investment (less
the cost of disposition, if any) and (y) the initial amount of such
Restricted Investment;
(f) to the extent that any Unrestricted Subsidiary is redesignated as a
Restricted Subsidiary after the date of the indenture in accordance
with the covenant described under the caption "--Limitation on
Designations of Unrestricted Subsidiaries", the lesser of (x) the net
book value of ICON's Investment in the Unrestricted Subsidiary at the
time of redesignation and (y) the Fair Market Value of ICON's
Investment in such Unrestricted Subsidiary as of the date of such
redesignation; and
(g) $2.0 million.
So long as no Default or Event of Default has occurred and is continuing or
would be caused thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration
thereof, if at such date of declaration such declaration complied with
the provisions of the preceding paragraph (and such payment shall be
deemed to have been paid on such date of declaration for purposes of the
calculation required by such paragraph);
(2) the purchase, redemption or other acquisition or retirement of any
shares of Capital Stock of ICON in exchange for or out of the net cash
proceeds of, a substantially concurrent issuance and sale (other than to
a Subsidiary of ICON) of shares of Capital Stock (other than Redeemable
Capital Stock) of ICON provided that the amount of any such net proceeds
that are utilized for any such purchase, redemption or other acquisition
or retirement is excluded from clause (3)(b), (3)(c) and (3)(d) of the
preceding paragraph;
(3) any purchase, redemption, defeasance or other acquisition or retirement
for value of any Subordinated Indebtedness (other than Redeemable
Capital Stock) in exchange for, or out of the net cash proceeds of, a
substantially concurrent issuance and sale (other than to any Subsidiary
of ICON) of any Capital Stock (other than Redeemable Capital Stock) of
ICON PROVIDED that the amount of any such net proceeds that are utilized
for any such purchase, redemption or other acquisition or retirement is
excluded from clause (3)(b), (3)(c) and (3)(d) of the preceding
paragraph;
(4) payments to HF Holdings, to the extent actually used by HF Holdings
within 180 days of such payment for the payment of taxes pursuant to the
Tax Sharing Agreement as the same may be amended from time to time in a
manner that is not materially adverse to ICON;
(5) payments to Holdings to pay its reasonable operating and administrative
expenses including, without limitation, directors' fees, legal and audit
expenses, SEC compliance expenses and corporate franchise and other
taxes, in an amount not to exceed in the aggregate $375,000 per year;
(6) the repurchase of Capital Stock of HF Holdings or options, warrants or
rights to acquire Capital Stock of HF Holdings from the full-time
members or former members of management of ICON or any Restricted
Subsidiary upon death, disability, retirement or termination of
employment of such members, in amounts not to exceed $1.5 million in any
fiscal year of ICON; provided that, if such repurchases are less than
$1.5 million in any fiscal year of ICON, the amount by which
$1.5 million exceeds such amount of repurchases actually made in such
fiscal year of ICON will be carried forward for the next fiscal year;
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(7) loans to members of management of ICON or any Restricted Subsidiary in
the ordinary course of business not to exceed $1.2 million at any one
time outstanding in addition to those otherwise specifically referred to
in the Exchange Offer and Consent Solicitation Statement;
(8) the purchase, redemption, defeasance or other acquisition or retirement
for value or payment of principal of any Subordinated Indebtedness
(other than Redeemable Capital Stock) through the issuance of new
Subordinated Indebtedness permitted to be incurred under clause (10) of
the definition of Permitted Indebtedness;
(9) any Restricted Payment made pursuant to agreements (A) in effect on the
Issue Date (B) referred to in the Exchange Offer and Consent
Solicitation Statement and the Annexes thereto and (C) listed on
Schedule I of the indenture, as from time to time amended thereafter;
PROVIDED that, as so amended, such agreements shall provide for terms
that are, in the aggregate, not more disadvantageous to the Holders of
Securities in any material respect than as in effect on the Issue Date;
and
(10) any payments made in settlement of claims arising out of the
transactions contemplated by, or made pursuant to agreements or
undertakings referred to in the Exchange Offer and Consent Solicitation
Statement.
The actions described in clauses (1), (5), (6), (7), (9) and (10) and
described in clause (4) (to the extent not deducted in determining Consolidated
Adjusted Net Income of ICON in clause (3)(a) of the preceding paragraph) of this
paragraph will be Restricted Payments that will be permitted to be taken in
accordance with this paragraph but will reduce the amount that would otherwise
be available for Restricted Payments under clause (3) of the preceding paragraph
(provided that any dividend paid pursuant to clause (1) of this paragraph will
reduce the amount that would otherwise be available under clause (3) of the
preceding paragraph when declared, but not also when subsequently paid pursuant
to such clause (1) and the actions described in clauses (2) and (3) and (8) of
this paragraph will be Restricted Payments that will be permitted to be taken in
accordance with this paragraph and will not reduce the amount that would
otherwise be available for Restricted Payments under clause (3) of the preceding
paragraph.
In computing Consolidated Adjusted Net Income of ICON,
(1) ICON will use audited financial statements for the portions of the
relevant period for which audited financial statements are available on
the date of determination and unaudited financial statements and other
current financial data based on its books and records for the remaining
portion of such period and
(2) ICON will be permitted to rely in good faith on the financial statements
and other financial data derived from the books and records of ICON that
are available on the date of determination.
If ICON or any of its Restricted Subsidiaries makes a Restricted Payment
which, at the time of making such Restricted Payment, would in the good faith
determination be permitted under the requirements of the indenture, such
Restricted Payment will be deemed to have been made in compliance with the
indenture notwithstanding any subsequent adjustments made in good faith to
ICON's financial statements affecting Consolidated Adjusted Net Income of ICON
for any period.
The amount of all Restricted Payments (other than cash) will be the Fair
Market Value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by ICON or such Restricted Subsidiary, as
the case may be, pursuant to the Restricted Payment. The Board of Directors'
determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
Fair Market Value exceeds $2.5 million. Not later than the date of making any
Restricted Payment pursuant to the first paragraph of this
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covenant, ICON will deliver to the Trustee an Officers' Certificate stating that
such Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this covenant were computed, together with a copy of
any fairness opinion or appraisal required by the indenture.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE (Section8.1)
ICON will not, in a single transaction or a series of related transactions,
directly or indirectly, consolidate or merge with or into any other Person or,
sell, assign, convey, transfer or otherwise dispose of all or substantially all
of its properties and assets as an entirety to any other Person or group of
affiliated Persons, or permit any of its Restricted Subsidiaries to enter into
any such transaction or transactions, if such transaction or transactions, in
the aggregate, would effectively result in a sale, assignment, conveyance,
transfer or disposition of all or substantially all of the properties and assets
of ICON and those of its Restricted Subsidiaries on a consolidated basis to any
other Person or group of affiliated Persons, unless:
(1) either ICON is the continuing corporation or the Person (if other than
ICON) formed by such consolidation or into which ICON or such Restricted
Subsidiary is merged or the Person which acquires by sale, assignment,
conveyance, transfer or disposition of all or substantially all of the
properties and assets of ICON and its Restricted Subsidiaries on a
consolidated basis (the "Surviving Entity") will be a corporation duly
organized and validly existing under the laws of the United States of
America, any state thereof or the District of Columbia and such Person
assumes by a supplemental indenture in a form reasonably satisfactory to
the Trustee all the obligations of ICON under the Notes and the indenture
and by an agreement in form reasonably satisfactory to the Trustee all
the obligations of ICON under the Exchange and Registration Rights
Agreement, and in each case, the indenture will remain in full force and
effect;
(2) immediately after giving effect to such transaction or transactions, no
Default or Event of Default has occurred and is continuing;
(3) immediately before and immediately after giving effect to such
transaction or transactions ICON (or the Surviving Entity if ICON is not
the continuing obligor under the indenture) (i) will have a Consolidated
Net Worth immediately after the transaction equal to or greater than the
Consolidated Net Worth of ICON immediately preceding the transaction and
(ii) would be permitted to incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the covenant described under the
caption "--Limitation on Indebtedness and Issuance of Preferred Stock" if
the ratio referred to therein were "2.0:1.0"; and
(4) in connection with any consolidation, merger, transfer, sale,
assignment, conveyance or other disposition contemplated hereby, ICON or
the Surviving Entity, as the case may be, will deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory
to the Trustee, an Officers Certificate stating that such consolidation,
merger, transfer, sale, assignment, conveyance or other disposition and
the supplemental indenture in respect thereof, if any, comply with the
requirements under the indenture and that all conditions precedent herein
provided for relating to such transaction or series of transactions have
been complied with, and an Opinion of Counsel stating that the above
requirements have been complied with.
In addition, ICON will not and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, lease all or substantially all of its
properties or assets, in one or more related transactions, to any other Person.
Notwithstanding the foregoing, ICON may not, in a single transaction or a
series of related transactions, directly or indirectly, consolidate or merge
with or into IHF Holdings or ICON Fitness, or
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sell, assign, convey, transfer or otherwise dispose of all or substantially all
of its properties and assets as an entirety to IHF Holdings or ICON Fitness, or
permit any of its Restricted Subsidiaries to enter into any such transaction or
transactions with IHF Holdings or ICON Fitness, unless all of the Indebtedness
of IHF Holdings or ICON Fitness is unsecured and is expressly subordinate in
right of payment to the Notes.
Notwithstanding the foregoing, ICON or any Wholly Owned Restricted
Subsidiary may consolidate, combine or amalgamate with or merge with or into any
Wholly Owned Restricted Subsidiary or sell, assign, convey, lease, transfer or
otherwise dispose of all or substantially all of its properties and assets to
any Wholly Owned Restricted Subsidiary.
Upon any consolidation of ICON with or merger of ICON with or into any other
corporation or any sale, assignment, transfer, conveyance or other disposition
of the properties and assets of ICON substantially as an entirety to any Person
as described above, the Surviving Entity formed by such consolidation or into
which ICON is merged or to which such sale, assignment, transfer, conveyance or
other disposition is made will succeed to, and be substituted for (so that from
and after the date of such consolidation, merger, sale, lease, conveyance or
other disposition, the provisions of the indenture referring to "ICON" shall
refer instead to the Surviving Entity and not to ICON), and may exercise every
right and power of ICON under the indenture with the same effect as if such
Surviving Entity had been named as ICON herein, PROVIDED, HOWEVER, that the
predecessor company will not be relieved from the obligation to pay the
principal of and interest on the Notes except in the case of a sale, conveyance
or transfer of ICON's assets that meets the requirements described above.
For all purposes of the indenture and the Notes (including this covenant and
the covenants described under the captions "--Limitation on Indebtedness and
Issuance of Preferred Stock", "--Limitations on Restricted Payments" and
"--Limitations on Liens"), Subsidiaries of any Surviving Entity will, upon such
transaction or series of related transactions, become Restricted Subsidiaries or
Unrestricted Subsidiaries and all Indebtedness, and all Liens on property or
assets, of ICON and the Restricted Subsidiaries in existence immediately prior
to such transaction or series of related transactions will be deemed to have
been incurred upon such transaction or series of related transactions.
If, upon any such consolidation of ICON with or merger of ICON into any
other corporation, or upon any sale, assignment, transfer, conveyance or other
transfer of the property or assets of ICON substantially as an entirety to any
other Person, any property or assets of ICON would thereupon become subject to
any Lien, then unless such Lien could be created pursuant to the covenant
described under the caption "--Limitation on Liens" without equally and ratably
securing the Notes, ICON, prior to or simultaneously with such consolidation,
merger, sale, assignment, transfer, conveyance or other transfer, will as to
such property or assets, secure the Outstanding Notes equally and ratably with
(or prior to) the Indebtedness which upon such consolidation, merger, sale,
assignment, transfer, conveyance or other transfer is to become secured as to
such property or assets by such Lien, or will cause such Notes to be so secured.
LIMITATION ON TRANSACTIONS WITH AFFILIATES (Section10.13)
ICON will not, and will not permit any of its Restricted Subsidiaries to,
enter into or suffer to exist any transaction or series of related transactions
(including the sale, purchase, exchange or lease of assets, property or services
or enter into or make any payment, loan, advance or guarantee) with or for the
benefit of any Affiliate of ICON or such Restricted Subsidiary unless such
transaction or series of related transactions is in writing on terms that are no
less favorable to ICON or such Restricted Subsidiary, as the case may be, than
would be available in a comparable transaction in arm's-length dealings with an
unrelated third party; PROVIDED, HOWEVER, that, ICON will not, and will not
permit any
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of its Restricted Subsidiaries to, enter into or suffer to exist any such
transaction or series of related transactions which, individually or in the
aggregate, involve payments in excess of:
(1) $750,000, unless an Officers' Certificate stating that such transaction
complies with this covenant is delivered to the Trustee,
(2) $1.0 million, unless the prior good faith approval of a majority of
ICON's Disinterested Directors has been obtained and Board Resolution
relating thereto has been passed and set forth in an Officers'
Certificate delivered to the Trustee, or
(3) $5.0 million, unless the prior good faith approval of a majority of
ICON's Disinterested Directors has been obtained and the Board of
Directors has obtained from any nationally recognized investment banking
firm a favorable opinion as to the fairness to it of the transaction
(copies of which shall be filed with the Trustee).
However, the preceding restrictions will not apply to:
(a) reasonable fees and compensation, loans or options to purchase Common
Stock, indemnification and other benefits paid or made available to
directors and full time officers and employees of ICON or any of its
Restricted Subsidiaries for services rendered in such person's capacity
as an officer, director or employee of ICON or the applicable Restricted
Subsidiary, in each case entered into in the ordinary course of business
consistent with past practice,
(b) transactions with or among, or solely for the benefit of ICON, or any of
its Wholly-Owned Restricted Subsidiaries,
(c) transactions with an Unrestricted Subsidiary effected as part of a
Securitization Transaction, and
(d) payments and other transactions pursuant to agreements in effect on the
Issue Date and referred to in the Exchange Offer and Consent Solicitation
Statement as from time to time amended thereafter; PROVIDED that, as so
amended, such agreements shall provide for terms that are, in aggregate,
not more disadvantageous to the Holders of Notes in any material respect
than as in effect on the Issue Date.
LIMITATION ON LIENS (Section10.14)
ICON will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, affirm or suffer to exist any Lien of any
kind on or with respect to any of its property or assets, whether owned at the
date of the indenture or thereafter acquired, or any income, profits or proceeds
therefrom, except if the Notes are directly secured equally and ratably with (or
prior to in the case of Liens with respect to Subordinated Indebtedness) the
obligation or liability secured by such Lien; PROVIDED that Permitted Liens
shall not be subject to the operation of the foregoing.
LIMITATION ON LINE OF BUSINESS (Section10.16)
ICON will not, and will not permit any Restricted Subsidiary to engage in
any business other than Permitted Businesses.
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LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS (Section10.18)
ICON will not permit any Restricted Subsidiary (including Foreign
Subsidiaries) that is not a Subsidiary Guarantor, directly or indirectly, to
Guarantee or pledge any assets to secure the payment of any other Indebtedness
of ICON or any Subsidiary Guarantor unless:
(1) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the indenture providing for the Guarantee of
the payment of the Notes by such Subsidiary, which Guarantee will be
senior to or PARI PASSU with such Restricted Subsidiary's Guarantee of or
pledge to secure such other Indebtedness, unless such other Indebtedness
is Senior Indebtedness, in which case the Guarantee of the Notes may be
subordinated to the Guarantee of such Senior Indebtedness to the same
extent as the Notes are subordinated to such Senior Indebtedness and
(2) such Restricted Subsidiary will simultaneously waive, and agree that it
will not in any manner whatsoever claim or take any benefit from, any
rights of reimbursement, indemnity or subrogation or any other rights
against ICON or any other Subsidiary as a result of any payment by such
Subsidiary under its Guarantee of the Notes.
Notwithstanding the preceding paragraph, if any Restricted Subsidiary
(including Foreign Subsidiaries) that is organized under the laws of Quebec,
Canada would otherwise be required pursuant to the preceding paragraph to
provide a Guarantee of the payment of the Notes by such Subsidiary, such
obligation to provide such a Guarantee will be satisfied so long as such
Restricted Subsidiary delivers to the Trustee a Guarantee of another Subsidiary
Guarantor's Guarantee of the payment of the Notes, which Guarantee will be
substantially in the form of the Guarantee by ICON du Canada, Inc. of the
obligations of 510152 N.B. LTD., as Subsidiary Guarantor under the indenture
delivered to the Trustee on the date of the indenture.
Any Subsidiary Guarantee of the Notes (including any Guarantee provided
pursuant to the immediately preceding paragraph) will provide by its terms that
it will be automatically and unconditionally released and discharged under the
circumstances described under the caption "--Subsidiary Guarantees."
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES (Section10.19)
ICON will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to:
(1) pay dividends, in cash or otherwise, or make any other distribution on
its Capital Stock,
(2) pay any Indebtedness owed to ICON or any Restricted Subsidiary,
(3) make any loans or advances to ICON or any Restricted Subsidiary or
(4) transfer any of its properties or assets to ICON or any Restricted
Subsidiary.
However, the preceding restrictions will not apply to:
(a) any encumbrance or restriction pursuant to an agreement relating to
Indebtedness in effect on the date of the indenture, including pursuant
to the Credit Agreement;
(b) any encumbrance or restriction pursuant to an agreement relating to
Indebtedness with respect to a Restricted Subsidiary that is not a
Restricted Subsidiary on the date of the indenture, in existence at the
time such Person becomes a Restricted Subsidiary and not incurred in
connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary (so long as such encumbrance or restriction does
not extend to any assets of ICON
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or any other Restricted Subsidiary) and provided that, the Indebtedness
was permitted by the terms of the indenture to be incurred;
(c) any encumbrance or restriction pursuant to customary nonassignment
provisions in leases governing leasehold interests only to the extent
such provisions restrict the transfer of the lease or the leased property
entered into in the ordinary course of business consistent with past
practices;
(d) any encumbrance or restriction due to applicable law;
(e) any encumbrance or restriction pursuant to Purchase Money Obligations
permitted under the indenture, but only to the extent such restrictions
restrict the transfer of the property purchased with the proceeds of the
applicable Purchase Money Obligation;
(f) provisions with respect to the disposition or distribution of assets or
property in joint venture agreements and other similar agreements entered
into in the ordinary course of business consistent with past practices;
(g) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business
consistent with past practices;
(h) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by such Restricted Subsidiary
pending its sale or other disposition;
(i) restrictions on the transfer of assets subject to any Permitted Lien by
the holder of such Lien;
(j) any agreement or instrument governing Indebtedness (whether or not
outstanding) of Foreign Subsidiaries that constitutes Permitted
Indebtedness; and
(k) Indebtedness incurred pursuant to clause (10) of the definition of
"Permitted Indebtedness"; PROVIDED, HOWEVER, that, the provisions
contained in such new Indebtedness are no more restrictive in any
material respect than those contained in the agreements governing
Indebtedness being refinanced.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS (Section10.20)
ICON will not, and will not permit its Restricted Subsidiaries to, enter
into, renew or extend any transactions or series of related transactions
pursuant to which ICON or any such Restricted Subsidiary sells or transfers any
property or asset in connection with the leasing, or the resale against
installment payments, or as part of an arrangement involving the leasing or the
resale against installment payments, of such property or asset to the seller or
transferor ("Sale and Leaseback Transaction") unless:
(1) ICON or that Restricted Subsidiary could have:
(a) incurred Indebtedness in an amount equal to the Attributable Debt
relating to that Sale and Leaseback transaction pursuant to the
Consolidated Fixed Charge Coverage Ratio test in described in the
"Limitation on Indebtedness and Issuance of Preferred Stock" covenant
and
(b) incurred Lien to secure that Indebtedness pursuant to the "Limitation
on Liens" covenant;
(2) the gross cash proceeds of that Sale and Leaseback Transaction are at
least equal to the Fair Market Value of the property that is the subject
of that Sale and Leaseback Transaction, as determined in good faith by
the Board of Directors evidenced by a Board Resolution set forth in an
Officers' Certificate delivered to the Trustee; and
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(3) the Sale and Leaseback Transaction is treated as an Asset Sale and all
of the conditions of the "Asset Sales" covenant (including the provisions
concerning the application of Net Cash Proceeds) are satisfied with
respect to such Sale and Leaseback Transaction, treating all of the
consideration received in such Sale and Leaseback Transaction as Net Cash
Proceeds for purposes of the covenant described under the caption
"--Repurchase at the Option of Holders--Asset Sales."
LIMITATION ON DESIGNATION OF UNRESTRICTED SUBSIDIARIES (Section10.22)
The Board of Directors of ICON may designate any Restricted Subsidiary of
ICON (other than any Restricted Subsidiary which owns Capital Stock of a
Restricted Subsidiary) as an "Unrestricted Subsidiary" under the indenture (a
"Designation") only if:
(1) no Default or Event of Default has occurred and is continuing at the
time of or after giving effect to such Designation; and
(2) except in the case of a newly organized Subsidiary in which ICON and its
Restricted Subsidiaries have made an aggregate Investment of $1,000 or
less or a Subsidiary formed in connection with a Securitization
Transaction with ICON or one or more Restricted Subsidiaries, ICON would
be permitted under the indenture to make an Investment constituting a
Restricted Payment at the time of Designation (assuming the effectiveness
of such Designation) in an amount (the "Designation Amount") equal to the
Fair Market Value of the aggregate amount of its Investments in such
Subsidiary on such date.
ICON may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation"), whereupon such Subsidiary will then constitute a
Restricted Subsidiary, if:
(1) no Default or Event of Default has occurred and is continuing at the
time of and after giving effect to such Revocation; and
(2) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time,
have been permitted to be incurred for all purposes of the indenture.
All Designations and Revocations must be evidenced by Officers' Certificates
of ICON delivered to the Trustee certifying compliance with the foregoing
provisions.
WAIVER OF CERTAIN COVENANTS (Section10.23)
ICON may omit in any particular instance to comply with any term, provision
or condition set forth in the indenture relating to the last paragraph of the
covenant described under the caption "--Consolidation, Merger, Conveyance,
Transfer or Lease" and the covenants relating to the following matters:
- maintenance of insurance,
- statement by officers as to default,
- provision of financial statements,
- indebtedness and issuance of preferred stock,
- restricted payments,
- transactions with affiliates,
- liens,
- change of control,
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- line of business,
- asset sales,
- issuances of guarantees of indebtedness,
- dividends and other payment restrictions affecting subsidiaries,
- sale and leaseback transactions,
- designation of unrestricted subsidiaries,
- other senior indebtedness,
- rating and additional subsidiary guarantees,
if before or after the time for such compliance the Holders of at least a
majority in principal amount of the Outstanding Securities, by act of such
Holders, waive such compliance in such instance with such term, provision or
condition, but no such waiver will extend to or affect such term, provision or
condition except to the extent so expressly waived, and, until such waiver
becomes effective, the obligations of ICON and the duties of the Trustee in
respect of any such term, provision or condition will remain in full force and
effect.
LIMITATION ON OTHER SENIOR INDEBTEDNESS (Section10.24)
ICON will not incur, and will not permit any Restricted Subsidiary to,
create, issue, assume, guarantee or otherwise become liable for any Senior
Indebtedness other than Indebtedness under the Credit Agreement.
In addition, ICON will not, and will not permit any Restricted Subsidiary to
incur Indebtedness or issue any shares of Preferred Stock of such Subsidiary,
directly or indirectly, in exchange for or upon the conversion of any
Indebtedness of IHF Holdings or ICON Fitness, unless such Indebtedness is
unsecured and is expressly subordinate in right of payment to the Notes.
PAYMENTS FOR CONSENT (Section10.26)
ICON will not, and will not permit any of its Subsidiaries to, directly or
indirectly, pay or cause to be paid any consideration to or for the benefit of
any Holder of Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the indenture or the Notes unless such
consideration is offered to be paid or is paid to all Holders of the Notes that
consent, waive or agree to amend in the time frame set forth in the Exchange
Offer and Consent Solicitation Statement relating to such consent, waiver or
agreement.
ADDITIONAL SUBSIDIARY GUARANTEES (Section10.27)
If ICON or any of its Restricted Subsidiaries acquires or creates another
Domestic Subsidiary after the date of the indenture or if ICON is otherwise
required pursuant to the covenant described under the caption "--Limitation on
Issuances of Guarantees of Indebtedness", then ICON will cause that Domestic
Subsidiary or such other Subsidiary, as the case may be, to become a Subsidiary
Guarantor and execute a supplemental indenture and deliver an Opinion of Counsel
to the Trustee within 10 Business Days of the date on which it was acquired or
created.
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EVENTS OF DEFAULT AND REMEDIES
EVENTS OF DEFAULT (Section5.1)
Each of the following constitutes an Event of Default under the indenture:
(1) default in the payment of the principal of or premium, if any, when due
and payable, on any of the Notes, whether or not prohibited by the
Subordination provisions contained in the indenture; or
(2) default in the payment of an installment of interest or Liquidated
Damages on any of the Notes, when due and payable, and continuance of
such default for a period of 30 days, whether or not prohibited by the
Subordination provisions contained in the indenture; or
(3) default in the performance or breach of the provisions described under
the caption "--Consolidation, Merger, Conveyance, Transfer or Lease" or
"--Repurchase at the Option of Holders--Change of Control" or "--Asset
Sales"; or
(4) ICON or any Restricted Subsidiary fails to perform or observe any other
term, covenant or agreement contained in the Notes or the indenture
(other than a default specified in (1), (2) or (3) above) for a period of
45 days after written notice of such failure requiring ICON to remedy the
same has been given (a) to ICON by the Trustee or (b) to ICON and the
Trustee by the Holders of 25% in aggregate principal amount of the Notes
then Outstanding; or
(5) default or defaults under one or more mortgages, bonds, debentures or
other evidences of Indebtedness under which ICON or any of its Restricted
Subsidiaries then has outstanding Indebtedness in excess of $5,000,000,
individually or in the aggregate, and either (a) such Indebtedness is
already due and payable in full or (b) such default or defaults have
resulted in the acceleration of the maturity of such Indebtedness; or
(6) one or more final judgments, orders or decrees of any court or
regulatory or administrative agency of competent jurisdiction for the
payment of money in excess of $5,000,000, individually or in the
aggregate, is entered against ICON or any of its Restricted Subsidiaries
or any of their properties which is not discharged or fully bonded and
there has been a period of 60 consecutive days after the date on which
any period for appeal has expired and during which a stay of enforcement
of such judgment, order or decree, is not in effect; or
(7) (a) any holder of at least $5,000,000 in aggregate principal amount of
secured Indebtedness of ICON or of any of its Restricted Subsidiaries as
to which a default has occurred and is continuing commences judicial
proceedings (which proceedings remain unstayed for 5 Business Days) to
foreclose upon assets of ICON or such Restricted Subsidiary having an
aggregate Fair Market Value, individually or in the aggregate, in excess
of $5,000,000 or exercises any right under applicable law or applicable
security documents to take ownership of any such assets in lieu of
foreclosure or (b) any action described in the foregoing clause (a)
results in any court of competent jurisdiction issuing any order for the
seizure of such assets; or
(8) certain bankruptcy events with respect to ICON and its significant
subsidiary; or
(9) except as otherwise permitted by the indenture, any Subsidiary Guarantee
is held in any judicial proceeding to be unenforceable or invalid or
ceases for any reason to be in full force and effect or any Subsidiary
Guarantor denies or disaffirms its obligations under its Subsidiary
Guarantee.
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ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT (Section5.2)
If an Event of Default (other than an Event of Default specified in clause
(8) under the caption "--Events of Default") occurs and is continuing, then the
Trustee or the Holders of not less than 25% in aggregate principal amount of the
Outstanding Notes may declare the principal of, premium, if any, and accrued
interest on all the Notes to be due and payable immediately, by a notice in
writing to ICON (and to the Trustee if given by Holders), and upon any such
declaration such principal amount shall become immediately due and payable. If
an Event of Default specified in clause (8) under the caption "--Events of
Default" occurs and is continuing, then the principal of, premium, if any, and
accrued interest on all the Notes will become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
At any time after a declaration of acceleration has been made and before a
judgment or decree for payment of the money due has been obtained by the Trustee
as hereinafter provided, the Holders of a majority in principal amount of the
Outstanding Notes, by written notice to ICON and the Trustee, may rescind and
annul such declaration and its consequences if
(1) ICON has paid or deposited with the Trustee a sum sufficient to pay
(a) all overdue interest on all Outstanding Notes,
(b) all unpaid principal of (and premium, if any, on) any Outstanding
Notes which has become due otherwise than by such declaration of
acceleration, and interest on such unpaid principal at the rate borne
by the Notes,
(c) to the extent that payment of such interest is lawful, interest on
overdue interest at the rate borne by the Notes, and
(d) all sums paid or advanced by the Trustee hereunder and the reasonable
compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel;
(2) such rescission would not conflict with any judgment or decree of a
court of competent jurisdiction; and
(3) all Events of Default, other than the non-payment of amounts of
principal of (or premium, if any, on) or interest on Notes which have
become due solely by such declaration of acceleration, have been cured or
waived as provided under the caption "--Waiver of Past Defaults."
No such rescission will affect any subsequent default or impair any right
consequent thereon.
Notwithstanding the preceding paragraph, in the event of a declaration of
acceleration in respect of the Notes because of an Event of Default specified in
clauses (5) or (7) under the caption "--Events of Default" has occurred and is
continuing, such declaration of acceleration will be automatically annulled if
the Indebtedness that is the subject of such Event of Default has been
discharged or the holders thereof have rescinded their declaration of
acceleration or notification or action, as applicable, in respect of such
Indebtedness, and written notice of such discharge or rescission, as the case
may be, has been given to the Trustee by ICON or such Subsidiary and
countersigned by the holders of such Indebtedness or a trustee, fiduciary or
agent for such holders or the Person or Persons entitled to take the actions
described in clauses (5)(b) or (7) under the caption "--Events of Default,"
within 30 days after such declaration of acceleration in respect of the Notes,
and no other Event of Default has occurred during such 30-day period which has
not been cured or waived during such period.
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LIMITATION ON SUITS (Section5.7)
No Holder of any Notes will have any right to institute any proceeding,
judicial or otherwise, with respect to the indenture, or for the appointment of
a receiver or trustee, or for any other remedy hereunder, unless:
(1) such Holder has previously given written notice to the Trustee of a
continuing Event of Default;
(2) the Holders of not less than 25% in aggregate principal amount of the
Outstanding Notes have made written request to the Trustee to institute
proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable indemnity
against the costs, expenses and liabilities to be incurred in compliance
with such request;
(4) the Trustee for 30 days after its receipt of such notice, request and
offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been given to
the Trustee during such 30-day period by the Holders of a majority or
more in aggregate principal amount of the Outstanding Notes;
it being understood and intended that no one or more Holders have any right in
any manner whatever by virtue of, or by availing of, any provision of the
indenture to affect, disturb or prejudice the rights of any other Holders, or to
obtain or to seek to obtain priority or preference over any other Holders or to
enforce any right under the indenture, except in the manner herein provided and
for the equal and ratable benefit of all the Holders.
WAIVER OF PAST DEFAULTS (Section5.13)
The Holders of not less than a majority in aggregate principal amount of the
Outstanding Notes may on behalf of the Holders of all the Notes waive any past
default described under the indenture and its consequences, except a default
(1) in respect of the payment of the principal of (or premium, if any, on)
or interest on any Note, or
(2) in respect of a covenant or provision of the indenture which under the
caption "--Supplemental Indentures" cannot be modified or amended without
the consent of the Holder of each outstanding Note affected.
Upon any such waiver, such default will cease to exist, and any Event of
Default arising therefrom will be deemed to have been cured, for every purpose
of the indenture; but no such waiver will extend to any subsequent or other
default or Event of Default or impair any right consequent thereon.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of ICON, as
such, will have any liability for any of ICON's obligations under the Notes, the
indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
SEC that such a waiver is against public policy.
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DEFEASANCE AND COVENANT DEFEASANCE
ICON'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE (Section12.1)
ICON may, at its option, by Board Resolution, at any time, with respect to
the Notes, elect to have either the provisions regarding defeasance or those
regarding covenant defeasance apply to all outstanding Notes upon compliance
with the conditions set forth below.
DEFEASANCE AND DISCHARGE (Section12.2)
ICON may, at its option, elect to have its obligations and those of its
Subsidiary Guarantors discharged with respect to all Outstanding Notes on the
date the conditions set forth under the caption "--Conditions to Defeasance or
Covenant Defeasance" are satisfied (hereinafter, "Defeasance"), except for the
following which will survive until otherwise terminated or discharged hereunder:
(1) the rights of Holders of Outstanding Notes to receive, solely from the
trust fund described under the caption "--Conditions to Defeasance or
Covenant Defeasance" below and as more fully set forth in such section,
payments in respect of the principal of (and premium, if any, on) and
interest on such Notes when such payments are due,
(2) ICON's obligations with respect to such Notes under the provisions of
the indenture governing temporary securities, registration, registration
of transfer and exchange, mutilated, destroyed, lost and stolen
securities, the maintenance of an office or agency for payment and money
for security payments to be held in trust,
(3) the rights, powers, trusts, duties and immunities of the Trustee under
the indenture and
(4) this provision governing Defeasance and Covenant Defeasance.
Subject to compliance with this provision governing Defeasance and Covenant
Defeasance, ICON may exercise its option under this paragraph, notwithstanding
the prior exercise of its option under covenant defeasance below with respect to
the Notes.
COVENANT DEFEASANCE (Section12.3)
ICON may, at its option, elect to have its obligations and those of its
Subsidiary Guarantors released under certain of the covenants described in the
indenture on and after the date the conditions set forth below are satisfied
(hereinafter, "Covenant Defeasance"), and the Notes will thereafter be deemed
not to be "Outstanding" for the purposes of any direction, waiver, consent or
declaration or act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "Outstanding"
for all other purposes under the indenture. For this purpose, such Covenant
Defeasance means that, with respect to the Outstanding Notes, ICON and the
Subsidiary Guarantors may omit to comply with and will have no liability in
respect of any term, condition or limitation set forth in any such covenant,
whether directly or indirectly, by reason of any reference elsewhere in the
indenture to any such covenant or by reason of any reference in any such
covenant to any other provision of the indenture or in any other document and
such omission to comply shall not constitute a Default or an Event of Default
under clauses (3) or (4) described under the caption "--Events of Default", but,
except as specified above, the remainder of the indenture and such Notes will be
unaffected thereby.
CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE (Section12.4)
In order to exercise either defeasance or covenant defeasance:
(1) ICON must have irrevocably deposited or caused to be deposited with the
Trustee (or another trustee satisfying the requirements of the indenture
who will agree to comply with the
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provisions of the Defeasance and Covenant Defeasance provision applicable
to it) as trust funds in trust for the purpose of making the following
payments of principal of (and premium, if any, on) and interest on the
outstanding Notes on the Stated Maturity (or Redemption Date, if
applicable) of such principal (and premium, if any) or installment of
interest; PROVIDED that the Trustee has been irrevocably instructed to
apply such money or the proceeds of such U.S. Government Obligations to
said payments with respect to the Notes. Before such a deposit, ICON may
give to the Trustee a notice of its election to redeem all of the
Outstanding Notes at a future date in accordance with the terms described
in the indenture which notice will be irrevocable. Such irrevocable
redemption notice, if given, will be given effect in applying the
foregoing.
(2) No Default or Event of Default with respect to the Notes has occurred
and is continuing on the date of such deposit.
(3) Such Defeasance or Covenant Defeasance will not result in a breach or
violation of, or constitute a default under, the indenture (including the
subordination provisions) or any other material or instrument to which
ICON or any Subsidiary Guarantor is a party or by which it is bound.
(4) Certain other customary conditions precedent are satisfied.
SUPPLEMENTAL INDENTURES
Modifications and amendments of the indenture may be made by ICON, when
authorized by a Board Resolution, and the Trustee with the consent of the
Holders of not less than a majority in principal amount of the Outstanding
Notes; PROVIDED, HOWEVER, that no such modification or amendment may, without
the consent of the Holder of each Outstanding Note affected:
(1) change the Stated Maturity of the principal of, or any installment of
interest on, any Note, or reduce the principal amount thereof or the rate
of interest thereon or any premium payable upon the redemption thereof,
or change the coin or currency in which any Note or any premium or the
interest thereon is payable (except with respect to liquidated damages as
provided in the Exchange and Registration Rights Agreement), or impair
the right to institute suit for the enforcement of any such payment after
the Stated Maturity thereof (or, in the case of redemption, on or after
the Redemption Date); or
(2) reduce the percentage in principal amount of outstanding Notes, the
consent of whose Holders is required for any such supplemental indenture,
or the consent of whose Holders is required for any waiver of compliance
with some provisions of or defaults under the indenture and their
consequences; or
(3) modify any of the provisions in the indenture relating to supplemental
indenture, waiver of past defaults and waiver of some covenants, except
to increase any such percentage or to provide that some other provisions
of the indenture cannot be modified or waived without the consent of the
Holder of each Outstanding Note affected thereby; or
(4) except as otherwise permitted under the caption "--Certain
Covenants--Consolidation, Merger, Conveyance, Transfer or Lease," consent
to the assignment or transfer by ICON of any of its rights and
obligations under the indenture; or
(5) make any change in the subordination provisions of the indenture that
adversely affects the rights of any Holder of the Notes. (Section9.2)
The Holders of at least a majority in principal amount of the Outstanding
Notes may waive compliance with some restrictive covenants and provisions of the
indenture as described under the caption "--Certain Covenants--Waiver of
Covenants."
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ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indenture
without charge by writing to ICON Health & Fitness, Inc. 1500 South, 1000 West
Logan, Utah 84321, Attention: Corporate Secretary.
DEFINITIONS
Set forth below is a summary of defined terms used in the indenture.
Reference is made to the indenture for the full definition of all such terms, as
well as any other captioned terms used herein for which no definition is
provided.
"Acquired Indebtedness" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other Person
is merged with or into or became a Subsidiary of such specified Person,
whether or not such Indebtedness is incurred in connection with, or in
contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person:
(1) which directly or indirectly through one or more intermediaries
controls, is controlled by or is under common control with, such Person,
(2) which directly or indirectly through one or more intermediaries
beneficially owns or holds 10% or more of the combined voting power of
the total Voting Stock of such Person, or
(3) of which 10% or more of the combined voting power of the total Voting
Stock (or in the case of a Person that is not a corporation, 10% or more
of the equity interest), directly or indirectly, through one or more
intermediaries is beneficially owned or held by such Person;
provided that the term "Affiliate" shall not be deemed to apply to any Bank
solely by virtue of its ownership directly or indirectly of up to 20% of the
Voting Stock of ICON. For the purposes of this definition, "control" when used
with respect to any Person means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling", "controlled
by" and "under common control with" have meanings correlative to the foregoing.
For the avoidance of doubt, HF Holdings, Bain Capital and Credit Suisse First
Boston Corporation shall be deemed Affiliates of ICON as of the Issue Date.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of business
consistent with past practices; provided that the sale, conveyance or
other disposition of all or substantially all of the assets of ICON and
its Restricted Subsidiaries taken as a whole shall be governed by the
covenants described under the captions "--Certain
Covenants--Consolidation, Merger, Conveyance, Transfer or Lease" and
"--Repurchase at the Option of Holders--Change of Control" and not
"--Asset Sales" and
(2) the issuance or sale of Capital Stock by any of ICON's Restricted
Subsidiaries.
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Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that
(a) involves assets having a Fair Market Value of less than $500,000 or
(b) results in net proceeds to ICON and its Restricted Subsidiaries of
less than $500,000,
(2) a transfer of assets between or among ICON and its Restricted
Subsidiaries,
(3) an issuance of Capital Stock by a Restricted Subsidiary to ICON or to
another Restricted Subsidiary,
(4) a Restricted Payment that is permitted by the covenant "Limitation on
Restricted Payments" and
(5) the sale of accounts receivable transferred to an Unrestricted
Subsidiary or any other Person that is not a Subsidiary of ICON in
connection with a Securitization Transaction for the Fair Market Value
thereof, including cash in an amount at least equal to 75% of the Fair
Market Value thereof.
For purposes of clause (5) of the immediately preceding sentence, Securitization
Notes shall be deemed to be cash.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value of the obligation of the lessee for
net rental payments during the remaining term of the lease included in such sale
and leaseback transaction including any period for which such lease has been
extended or may, at the option of the lessor, be extended. Such present value
shall be calculated using a discount rate equal to the rate of interest implicit
in such transaction, determined in accordance with GAAP.
"Average Life to Stated Maturity" means, when applied to any Indebtedness at
any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment
at final maturity, in respect thereof, by
(b) the number of years (calculated to the nearest one-twelfth) that will
elapse between such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Bankruptcy Law" means Title 11, United States Code, as amended, or any
similar United States Federal or State law relating to bankruptcy, insolvency,
receivership, winding-up, liquidation, reorganization or relief of debtors or
any amendment to, succession to or change in any such law.
"Banks" means General Electric Capital Corporation and Fleet National Bank,
as agents for the lenders, and the banks and other financial institutions from
time to time that are agents or lenders under the Credit Agreement.
"Board of Directors" means either the board of directors of ICON or any duly
authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of ICON to have been duly adopted by the Board of
Directors and to be in full force and effect on the date of such certification,
and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in The City of New York or in
the city where the Corporate Trust Office
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or the principal office of the Paying Agent is located are authorized or
obligated by law or executive order to close.
"Canadian Subsidiary Borrowing Base" means, as of any date, an amount equal
to the sum of:
(1) 85.0% of the book value of all accounts receivable owned by the ICON's
Canadian Restricted Subsidiaries) (excluding any accounts receivable from
an Affiliate of such Canadian Restricted Subsidiaries or that are more
than 90 days past due, less (without duplication) the allowance for
doubtful accounts attributable to current trade accounts receivable) and
(2) 60.0% of the book value of all inventory owned by such Canadian
Restricted Subsidiaries as of such date (with a seasonal increase of
70.0% of inventory in effect from July 1 through November 30 of each
year), all calculated on a consolidated basis and in accordance with
GAAP.
To the extent that information is not available as to the amount of accounts
receivable or inventory as of a specific date, Canadian Subsidiary Borrowing
Base shall be calculated utilizing the most recent available information.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company, partnership
or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing person; and in each case, all warrants, options or
other rights to acquire any of the foregoing (but excluding any debt
security that is convertible into, or exchangeable for, any of the
foregoing).
"Capitalized Lease Obligation" means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation under GAAP and, for the purpose of the indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
"Cash Equivalents" means:
(1) United States dollars,
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof having
maturities of not more than nine months from the date of acquisition,
(3) certificates of deposit and eurodollar time deposits with maturities of
six months or less from the date of acquisition and overnight bank
deposits, in each case with any United States commercial bank having
capital and surplus in excess of $500 million,
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and
(3) entered into with any financial institution meeting the
qualifications specified in clause (3) above, and
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service or Standard & Poor's Ratings Group and bankers'
acceptances of a financial institution with such
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a commercial paper rating and in each case maturing within 270 days after
the date of acquisition.
"Change of Control" means the occurrence of any of the following events:
(1) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than Bain Capital or its Affiliates or
Credit Suisse First Boston or its Affiliates, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that (x) a Person shall be deemed to have beneficial
ownership of all shares that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage
of time and (y) "beneficial owner" shall not include any "person" or
"group" solely by reason of such Person being party to the Stockholders
Agreement or a member of the limited liability company referred to in the
Exchange Offer and Consent Solicitation Statement), directly or
indirectly, of more than 50% of the total outstanding Voting Stock of
ICON or HF Holdings, as the case may be, measured by voting power rather
than number of shares;
(2) the sale, transfer, conveyance or other disposition (other than by way
of merger or consolidation), in one or a series of related transactions,
of all or substantially all of the assets of ICON and its Subsidiaries
taken as a whole to any "person" or "group" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) other than Bain Capital or
its Affiliates or Credit Suisse First Boston or its Affiliates;
(3) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of ICON or HF
Holdings, as the case may be (together with any new directors whose
election to such Board or whose nomination for election by the
stockholders of ICON or HF Holdings, as the case may be, was approved by
a vote of 66 2/3% of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved, cease for any reason to
constitute a majority of such Board of Directors then in office;
(4) ICON or HF Holdings, as the case may be, consolidates with or merges
with or into another Person, or any Person consolidates with or merges
into or with ICON or New Icon, as the case may be, in any such event
pursuant to a transaction in which any of the outstanding Voting Stock of
ICON or New Icon, as the case may be, is converted into or exchanged for
cash, securities or other property, other than any such transaction where
the outstanding Voting Stock of ICON or New Icon, as the case may be, is
not changed or exchanged at all (except only to the extent necessary to
reflect a change in the jurisdiction of incorporation of ICON or New
Icon, as the case may be) or where (A) the outstanding Voting Stock of
ICON or New Icon, as the case may be, outstanding immediately prior to
such transaction is changed into or exchanged for Voting Stock of the
surviving transferee Person (other than Redeemable Capital Stock)
constituting a majority of the outstanding shares of such Voting Stock of
such surviving transferee Person immediately after giving effect to such
issuance and (B) no "person" or "group" other than Bain Capital or its
Affiliates or Credit Suisse First Boston or its Affiliates, owns
immediately after such transaction, directly or indirectly, more than 50%
of the total outstanding Voting Stock of the surviving corporation;
(5) ICON is liquidated or dissolved or adopts a plan of liquidation or
dissolution; or
(6) HF Holdings shall hold less than 100% of the common stock of ICON.
"Code" means the Internal Revenue Code of 1986, as amended.
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"Company Borrowing Base" means, as of any date, an amount equal to the sum
of:
(1) 85.0% of the book value of all accounts receivable owned by ICON and its
Domestic Subsidiaries and Canadian Restricted Subsidiaries (excluding any
accounts receivable from an Affiliate of such Person or that are more
than 90 days past due, less (without duplication) the allowance for
doubtful accounts attributable to current trade accounts receivable) and
(2) 60.0% of the book value of all inventory owned by ICON and its Domestic
Subsidiaries and Canadian Restricted Subsidiaries as of such date (with a
seasonal increase of 70.0% of inventory in effect from July 1 through
November 30 of each year), all calculated on a consolidated basis and in
accordance with GAAP.
To the extent that information is not available as to the amount of accounts
receivable or inventory as of a specific date, Company Borrowing Base shall be
calculated utilizing the most recent available information.
"Company Request" or "Company Order" means a written request or order signed
in the name of ICON by its Chairman, Chief Executive Officer, its President, any
Vice President, its Treasurer, its Chief Financial Officer, Director of Finance
or an Assistant Treasurer, and delivered to the Trustee.
"Consolidated Adjusted Net Income (Loss" means, for any period, the
consolidated net income (or loss) of ICON and its Restricted Subsidiaries for
such period as determined in accordance with GAAP, adjusted, to the extent
included therein, by excluding, without duplication:
(1) any net after-tax extraordinary gains or losses (less all fees and
expenses relating thereto),
(2) the portion of net income (or loss) of ICON and its consolidated
Restricted Subsidiaries allocable to minority interests in unconsolidated
Persons or Persons that are accounted for by equity method of accounting
to the extent that cash dividends or distributions have not actually been
received by ICON or any Restricted Subsidiary,
(3) net income (or loss) of any Person combined with ICON or any Restricted
Subsidiary on a "pooling of interests" basis attributable to any period
prior to the date of combination,
(4) any gain or loss, net of taxes, realized upon the termination of any
employee pension benefit plan,
(5) net after-tax gains or losses (less all fees and expenses relating
thereto) in respect of dispositions of assets other than in the ordinary
course of business,
(6) the net income of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted without any prior
governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulations applicable to that Restricted Subsidiary or its shareholders,
or
(7) the cumulative effect of a change in accounting principles.
"Consolidated Fixed Charge Coverage Ratio" of ICON means, for any period,
the ratio of:
(1) the sum of:
(a) Consolidated Adjusted Net Income (Loss),
(b) Consolidated Interest Expense,
(c) Consolidated Income Tax Expense and
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(d) Consolidated Non-Cash Charges, in the case of (b), (c) and (d) only
to the extent such expense or charge was deducted in computing
Consolidated Adjusted Net Income (Loss), in each case, for such
period, of ICON and its Restricted Subsidiaries on a consolidated
basis, all determined in accordance with GAAP to:
(2) the sum of Consolidated Interest Expense for such period and cash and
non-cash dividends paid on any Preferred Stock of ICON or any Restricted
Subsidiary during such period.
In making such computation, the Consolidated Interest Expense attributable
to:
(1) interest on any Indebtedness computed on a pro forma basis and bearing a
floating interest rate shall be computed as if the rate in effect on the
date of computation had been the applicable rate for the entire period,
(2) interest on any Indebtedness under a revolving credit facility computed
on a pro forma basis shall be computed based upon the average daily
balance of such Indebtedness during the applicable period and
(3) notwithstanding clauses (1) and (2), interest on any Indebtedness
determined on a fluctuating basis, to the extent such interest is covered
by Interest Rate Protection Agreements, shall be deemed to have accrued
at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Income Tax Expense" means for any period the provision for
federal, state, local and foreign income taxes of ICON and its consolidated
Subsidiaries for such period as determined in accordance with GAAP.
"Consolidated Interest Expense" means, without duplication, for any period:
(x) the sum of:
(1) the interest expense of ICON and its Restricted Subsidiaries for such
period, whether paid or accrued and whether or not capitalized, as
determined on a consolidated basis in accordance with GAAP including,
without limitation:
(a) amortization of original issue discount and non-cash interest
payments,
(b) the net payment under Interest Rate Protection Agreements
(including amortization of discounts),
(c) the interest portion of any deferred payment obligation,
(d) imputed interest with respect to Attributable Debt,
(e) commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings and
(f) accrued interest, and
(2) (a) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by ICON or any
Restricted Subsidiary during such period and
(b) all capitalized interest of ICON and its consolidated Restricted
Subsidiaries, in each case as determined in accordance with GAAP,
minus
(y) any amortization of financing fees and expenses of ICON and its
consolidated Restricted Subsidiaries for such period.
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"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of:
(1) the consolidated equity of the common stockholders of such Person and
its consolidated Subsidiaries as of such date; plus
(2) the respective amounts reported on such Person's balance sheet as of
such date with respect to any series of Preferred Stock (other than
Redeemable Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only
to the extent of any cash received by such Person upon issuance of such
Preferred Stock.
"Consolidated Non-Cash Charges" means, for any period, the aggregate
depreciation, amortization and other non-cash charges of ICON and its
consolidated Restricted Subsidiaries for such period, as determined in
accordance with GAAP (excluding any non-cash charge which requires an accrual or
reserve for cash charges for any future period or amortization of a prepaid cash
expense that was paid in a prior period).
"Consolidation" means, with respect to the ICON, the consolidation of the
accounts of the Restricted Subsidiaries with those of ICON, all in accordance
with GAAP consistently applied; PROVIDED that, "consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary with the accounts
of ICON. The term "Consolidated" shall have a similar meaning.
"Corporate Trust Office" means the principal corporate trust office of the
Trustee, at which at any particular time its corporate trust business shall be
principally administered, which office at the date of the indenture is located
at The Bank of New York, 101 Barclay Street, New York, New York 10286, except
that with respect to presentation of Notes for payment or for registration of
transfer or exchange, such term shall mean the office or agency of the Trustee
at which, at any particular time, its corporate agency business shall be
conducted.
"Corporation" includes corporations, associations, companies and business
trusts.
"Credit Agreements" means one or more Credit Agreements among ICON and the
Banks, as in effect as of the date of the indenture, providing for a revolving
credit facility and term loans to ICON, as such agreements may be amended,
renewed, extended, substituted, refinanced, restructured, replaced, supplemented
or otherwise modified from time to time, including, without limitation,
amendments and modifications that provide for loans to Canadian Restricted
Subsidiaries and for sub-facilities (including, without limitation, any
successive renewals, extensions, substitutions, refinancings, restructurings,
replacements, supplementations or other modifications of any of the foregoing),
together with the security agreements and other agreements in favor of the Banks
entered into from time to time in connection with such credit agreements as such
security agreements and other agreements may be amended, supplemented or
otherwise modified from time to time.
"Currency Agreements" means any spot or forward foreign exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements entered into by ICON or any of its Restricted Subsidiaries in the
ordinary course of business and designed to protect against or manage exposure
to fluctuations in foreign currency exchange rates.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Depository" means, with respect to the Notes issuable or issued in whole or
in part in global form, The Depository Trust Company, and any and all successors
thereto appointed as depository hereunder and having become such pursuant to the
applicable provision of the indenture.
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"Disinterested Directors" means, with respect to any transaction or series
of related transactions, a member of the Board of Directors who does not have
any material direct or indirect financial interest in or with respect to such
transaction or series of related transactions.
"Domestic Subsidiary" means any Restricted Subsidiary that is incorporated
under the laws of the United States or any state thereof or the District of
Columbia.
"Event of Default" has the meaning set forth under "--Events of Default and
Remedies--Events of Default" above.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Offer and Consent Solicitation Statement" means the Exchange Offer
and Consent Solicitation Statement dated July 30, 1999 relating to the offer of
the Notes.
"Exchange and Registration Rights Agreement" means the Exchange and
Registration Rights Agreement between ICON and the holders of the Notes,
relating to the Notes, as such agreement may be amended, modified or
supplemented from time to time.
"Registered Exchange Offer" means the registered exchange offer for the
Notes which may be effected pursuant to the Exchange and Registration Rights
Agreement.
"Exchange Registration Statement" means the Exchange Registration Statement
as defined in the Exchange and Registration Rights Agreement.
"Exchange Notes" has the meaning stated in the first recital of the
indenture and refers to any Exchange Notes containing terms substantially
identical to Initial Notes (except that such Exchange Notes shall not contain
terms with respect to transfer restrictions) that are issued and exchanged for
the Initial Notes pursuant to the Exchange and Registration Rights Agreement and
the indenture.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer.
"Foreign Subsidiary" means any Subsidiary that is incorporated in a
jurisdiction outside of the U.S. and territories thereof.
"Foreign Subsidiary Borrowing Base" means, as of any date, an amount equal
to the sum of:
(1) 85.0% of the book value of all accounts receivable owned by the ICON's
Foreign Subsidiaries (other than Canadian Restricted Subsidiaries)
(excluding any accounts receivable from an Affiliate of such Foreign
Subsidiaries or that are more than 90 days past due, less (without
duplication) the allowance for doubtful accounts attributable to current
trade accounts receivable) and
(2) 60.0% of the book value of all inventory owned by such Foreign
Subsidiaries (other than Canadian Restricted Subsidiaries) as of such
date (with a seasonal increase of 70.0% of inventory in effect from
July 1 through November 30 of each year), all calculated on a
consolidated basis and in accordance with GAAP.
To the extent that information is not available as to the amount of accounts
receivable or inventory as of a specific date, Foreign Subsidiary Borrowing Base
shall be calculated utilizing the most recent available information.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in
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other statements by any other entity as have been approved by a significant
segment of the accounting profession, which are in effect on the Issue Date.
"Guarantee" or "guarantee" means a guarantee other than by endorsement of
negotiable instruments for collection in the ordinary course of business, direct
or indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Holder" means a Person in whose name a Note is registered in the Security
Register.
"Indebtedness" means, with respect to any Person, without duplication:
(1) all liabilities of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and
other current liabilities incurred in the ordinary course of business,
but including, without limitation, all obligations, contingent or
otherwise, of such Person in connection with any letter of credit,
bankers' acceptance or other similar credit transaction and in connection
with any agreement to purchase, redeem, exchange, convert or otherwise
acquire for value any Capital Stock of such Person, or any warrants,
rights or options to acquire such Capital Stock, now or hereafter
outstanding, if, and to the extent, any of the foregoing would appear as
a liability upon a balance sheet of such Person prepared in accordance
with GAAP,
(2) all obligations of such Person evidenced by bonds, notes, debentures or
other similar instruments, if, and to the extent, any of the foregoing
would appear as a liability upon a balance sheet of such Person prepared
in accordance with GAAP,
(3) all indebtedness of such Person created or arising under any conditional
sale or other title retention agreement with respect to property acquired
by such Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession
or sale of such property), but excluding accounts payable arising in the
ordinary course of business,
(4) all Capitalized Lease Obligations of such Person,
(5) all indebtedness referred to in the preceding clauses of other Persons
and all dividends of other Persons, the payment of which is secured by
(or for which the holder of such indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien upon property
(including, without limitation, accounts and contract rights) owned by
such Person, even though such Person has not assumed or become liable for
the payment of such Indebtedness or of such dividend (the amount of such
obligation being deemed to be the lesser of the value of such property or
asset or the amount of the obligation so secured),
(6) all guarantees by such Person of indebtedness referred to in this
definition,
(7) all Redeemable Capital Stock of such Person valued at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued
dividends and
(8) all obligations of such Person under or in respect of Interest Rate
Protection Agreements and Currency Agreements.
The amount of any Indebtedness outstanding as of any date shall be:
(a) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount and
(b) the principal amount thereof, together with any interest thereon that is
more than 30 days past due, in the case of any other Indebtedness.
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"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Notes.
"Interest Rate Protection Agreements" means any interest rate protection
agreements and other types of interest rate hedging agreements (including,
without limitation, interest rate swaps, caps, collars and similar agreements)
designed to minimize exposure to fluctuations in interest rates in respect of
Indebtedness.
"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan, or other extension of credit (including by means of a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by any other Person, except for purchases of assets in the ordinary course of
business of ICON or any of its Restricted Subsidiaries, and all other items that
would be classified as investments on a balance sheet prepared in accordance
with GAAP.
"Issue Date" means the closing date for the original issuance of the Notes
under the indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance of any kind upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired, whether or not filed, recorded or otherwise
perfected under applicable law, including any conditional sale or other title
retention agreement, any lease in the return thereof, any option or other
agreement to sell or give a security interest in and any filing or agreement to
give any financing statement under the Uniform Commercial Code or equivalent
statutes of any jurisdiction.
"Liquidated Damages" means all liquidated damages then owing pursuant to the
Registration Rights Agreement.
"Maturity" when used with respect to any Note means the date on which the
principal of such Note or an installment of principal becomes due and payable as
therein provided or as provided in the indenture, whether at Stated Maturity or
by declaration of acceleration, call for redemption or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means with respect to any Asset Sale the proceeds
thereof received by ICON or any of its Restricted Subsidiaries in the form of
cash or Cash Equivalents including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when disposed
for, cash or Cash Equivalents (including, without limitation, any cash received
upon the sale or other disposition of any non-cash consideration received in any
Asset Sale), net of:
(1) reasonable out-of-pocket fees and expenses (including legal, accounting
and investment banking and sales commissions) related to such Asset Sale,
(2) provisions for all taxes payable as a result of such Asset Sale,
(3) payments made to retire Indebtedness where payment of such Indebtedness
is secured by the assets or properties which are the subject of such
Asset Sale,
(4) amounts required to be paid to any Person (other than ICON or any
Restricted Subsidiary) owning a beneficial interest in the assets subject
to the Asset Sale and
(5) appropriate amounts to be provided by ICON or any Restricted Subsidiary,
as the case may be, as a reserve, in accordance with GAAP, against any
liabilities associated with such Asset Sale and retained by ICON or any
Restricted Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities,
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liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale (provided
that the amount of any such reserves shall be deemed to constitute Net
Cash Proceeds at the time such reserves shall have been released or are
not otherwise required to be retained as a reserve), all as reflected in
an Officers' Certificate delivered to the Trustee.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither ICON nor any of its Restricted Subsidiaries:
(a) provides credit support of any kind (including any undertaking,
guarantee, indemnity, agreement or instrument that would constitute
Indebtedness) or
(b) is directly or indirectly liable (as a guarantor, general partner or
otherwise), or
(c) constitutes a lender; and
(2) no default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder
of any other Indebtedness (other than the Notes) of ICON or any of its
Restricted Subsidiaries to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of ICON or any of its Restricted
Subsidiaries.
"Officers' Certificate" means a certificate signed by the Chairman, the
Chief Executive Officer, the President or a Vice President, and by the
Treasurer, the Chief Financial Officer, the Director of Finance, an Assistant
Treasurer, the Secretary or an Assistant Secretary of ICON, and delivered to the
Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
for ICON, including an employee of ICON, and who shall be acceptable to the
Trustee.
"Outstanding", when used with respect to Notes, means, as of the date of
determination, all Notes theretofore authenticated and delivered under the
indenture, except:
(1) Notes theretofore cancelled by the Trustee or delivered to the Trustee
for cancellation;
(2) Notes, or portions thereof, for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Trustee or any
Paying Agent (other than ICON) in trust or set aside and segregated in
trust by ICON (if ICON shall act as its own Paying Agent) for the Holders
of such Notes; provided that, if such Notes are to be redeemed, notice of
such redemption has been duly given pursuant to the indenture or
provision therefor satisfactory to the Trustee has been made;
(3) Notes, except to the extent provided under the caption "--Defeasance and
Covenant Defeasance--Defeasance and Discharge--Covenant Defeasance", with
respect to which ICON has effected defeasance and/or covenant defeasance
as provided under the caption "--Defeasance and Covenant Defeasance"; and
(4) Notes which have been paid pursuant to the provision of the indenture
governing mutilated, destroyed, lost and stolen notes or in exchange for
or in lieu of which other Notes have been authenticated and delivered
pursuant to the indenture, other than any such Notes in respect of which
there shall have been presented to the Trustee proof satisfactory to it
that such Notes are held by a bona fide purchaser in whose hands the
Notes are valid obligations of ICON;
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PROVIDED, HOWEVER, that, in determining whether the Holders of the requisite
principal amount of Outstanding Notes have given any request, demand,
authorization, direction, consent, notice or waiver hereunder, and for the
purpose of making the calculations required by TIA Section 313, Notes owned by
ICON or any other obligor upon the Notes or any Affiliate of ICON or such other
obligor shall be disregarded and deemed not to be Outstanding, except that, in
determining whether the Trustee shall be protected in making such calculation or
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Notes which the Trustee knows to be so owned shall be so
disregarded. Notes so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Notes and that the
pledgee is not ICON or any other obligor upon the Notes or any Affiliate of ICON
or such other obligor.
"Permitted Business" means the lines of business that ICON and its
Restricted Subsidiaries currently conduct on the date of the indenture and any
businesses that derive (or are expected to derive) a majority of their revenues
from products and activities reasonably related thereto.
"Permitted Indebtedness" means any of the following:
(1) Indebtedness of ICON and any Subsidiary Guarantor (including Canadian
Restricted Subsidiaries that are also Subsidiary Guarantors) under the
Credit Agreements; provided that the aggregate principal amount of such
Indebtedness at any one time outstanding shall not exceed the greater of
(a) the Company Borrowing Base plus $120 million and (b) $350 million, in
each case less (A) the aggregate amount of all Net Cash Proceeds of Asset
Sales applied by ICON and any of its Subsidiaries since the date of the
indenture to permanently repay Indebtedness under the Credit Agreement
pursuant to the covenant described under the caption "--Repurchase at the
Option of Holders--Asset Sales" and (B) the amount of outstanding
Indebtedness incurred by Canadian Restricted Subsidiaries pursuant to
clause (13) below; PROVIDED FURTHER that the amount of Indebtedness
permitted to be incurred pursuant to this clause (1) shall be in addition
to any Indebtedness permitted to be incurred under the Credit Agreements
in reliance on, and in accordance with, clauses (8) and (12) of this
definition of "Permitted Indebtedness";
(2) Indebtedness of ICON and any Restricted Subsidiary under the Notes;
(3) Indebtedness of ICON and any Restricted Subsidiary (other than under the
Credit Agreements) outstanding on the date of the indenture until such
amounts are repaid;
(4) obligations of ICON and any Restricted Subsidiary incurred in connection
with Interest Rate Protection Agreements relating to Indebtedness
(including Permitted Indebtedness) permitted pursuant to the covenant
described under the caption "--Certain Covenants--Limitation on
Indebtedness and Issuance of Preferred Stock" that are entered into in
the ordinary course of business;
(5) obligations of ICON and any Restricted Subsidiary incurred in connection
with Currency Agreements that are entered into in the ordinary course of
business of ICON and its Restricted Subsidiaries;
(6) the incurrence by ICON or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among ICON and any of its Restricted
Subsidiaries; PROVIDED, HOWEVER, that:
(a) if ICON or any Subsidiary Guarantor is the obligor on such
Indebtedness and the obligee is not ICON or any Subsidiary Guarantor,
such Indebtedness must be expressly subordinated to the prior payment
in full in cash of all obligations with respect to the Notes, in the
case of ICON, or the Subsidiary Guarantee of such Subsidiary
Guarantor, in the case of a Subsidiary Guarantor; and
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(b) (A) any subsequent issuance or transfer of Capital Stock that results
in any such Indebtedness being held by a Person other than ICON or a
Restricted Subsidiary thereof and (B) any sale or other transfer of
any such Indebtedness to a Person that is not either ICON or a
Restricted Subsidiary thereof; shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by ICON or such
Restricted Subsidiary, as the case may be, that was not permitted by
this clause (6);
(7) Indebtedness arising from customary agreements providing for
indemnification or similar obligations, or from guarantees, letters of
credit, surety bonds or performance bonds securing any obligations of
ICON pursuant to such agreements, in any case entered into in a
commercially reasonable manner in the ordinary course of business
consistent with past practices incurred in connection with the
disposition of any business, assets or Restricted Subsidiary of ICON, in
a principal amount not to exceed the proceeds received by ICON and its
Restricted Subsidiaries in connection with such disposition;
(8) Purchase Money Obligations and Capitalized Lease Obligations of ICON and
one or more Restricted Subsidiaries not to exceed, in the aggregate at
any time outstanding (including the amount of any additional Indebtedness
incurred under clause (1) of this definition of "Permitted Indebtedness"
in reliance on this clause (8)), $10 million;
(9) Indebtedness of Foreign Subsidiaries (other than Canadian Restricted
Subsidiaries) in an aggregate principal amount not to exceed, at any time
outstanding, the lesser of $50 million or the Foreign Subsidiary
Borrowing Base; PROVIDED, HOWEVER, that such amount shall be reduced by
the amount of Indebtedness incurred by such Foreign Subsidiaries pursuant
to clause (1) above;
(10) any renewals, extensions, substitutions, refundings, refinancings or
replacements (each, a "refinancing") of any Indebtedness (other than
intercompany Indebtedness) described in clauses (2) and (3) and
clause (12) of this definition of "Permitted Indebtedness," including any
successive refinancings so long as (a) the aggregate principal amount or
accreted value, if applicable,(or, if such Indebtedness provides for an
amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration thereof, then such lesser amount as of the
date of determination) of Indebtedness represented thereby is not
increased by such refinancing other than by an amount equal to the stated
amount of premium or other payment actually paid at such time to
refinance the Indebtedness, plus the amount of reasonable expenses of
ICON incurred in connection with such refinancing, (b) such refinancing
does not reduce the Average Life to Stated Maturity or shorten the Stated
Maturity of such Indebtedness, (c) such new Indebtedness is subordinated
to the Notes at least to the same extent as the Indebtedness being
refinanced if the Indebtedness being refinanced is Subordinated
Indebtedness and (d) such Indebtedness is incurred either by ICON or by
the Restricted Subsidiary which is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded;
(11) the accrual of interest, accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Redeemable Capital Stock in the form of additional shares of the same
class of Redeemable Capital Stock; PROVIDED, in each such case, that the
amount thereof is included in Consolidated Interest Expense of ICON as
accrued;
(12) Indebtedness of ICON and one or more Restricted Subsidiaries in
addition to that described in clauses (1) through (11) of this definition
of "Permitted Indebtedness," including Indebtedness incurred pursuant to
clause (10) above to refinance any Indebtedness incurred pursuant to this
clause (12), not to exceed $15 million in the aggregate at any one time
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outstanding (including the amount of any additional Indebtedness incurred
under clause (1) of this definition of "Permitted Indebtedness" in
reliance on this clause (12)); and
(13) Indebtedness of Canadian Restricted Subsidiaries (to the extent they
are not also Subsidiary Guarantors) under the Credit Agreements in an
aggregate principle amount not to exceed, at any time outstanding, the
lesser of $50 million or the Canadian Subsidiary Borrowing Base.
"Permitted Investment" means:
(1) Investments in any Restricted Subsidiary or any Investment in any Person
by ICON or any Restricted Subsidiary as a result of which such Person
becomes a Restricted Subsidiary (PROVIDED, HOWEVER, that in each case
such Restricted Subsidiary is engaged in a Permitted Business) or any
Investment in ICON by a Restricted Subsidiary;
(2) intercompany Indebtedness to the extent permitted under clause (6) of
the definition of "Permitted Indebtedness";
(3) Investments in Cash Equivalents;
(4) Investments in an amount not to exceed $2 million in the aggregate at
any given time outstanding;
(5) Investments in existence on the date of the indenture;
(6) Investments by ICON or any Restricted Subsidiary in any Person
(including any Unrestricted Subsidiary) whose operations consist of, or
has been formed to operate, a Permitted Business in an amount not to
exceed $8 million in the aggregate at any given time outstanding; and
(7) any Investment made by ICON or a Restricted Subsidiary in an
Unrestricted Subsidiary or any other Person that is not a Subsidiary of
ICON in connection with a Securitization Transaction; provided that any
such Investment is in the form of a Securitization Note or an equity
interest.
"Permitted Liens" means any of the following:
(1) any Lien existing as of the date of the indenture (other than Liens
securing Indebtedness under the Credit Agreements);
(2) any Lien arising by reason of (a) any judgment, decree or order of any
court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of
such judgment, decree or order shall not have been finally terminated or
the period within which such proceedings may be initiated shall not have
expired, the claims secured thereby are being contested in good faith by
appropriate proceedings, adequate reserves have been established with
respect to such claims in accordance with GAAP and no Default or Event of
Default would result thereby; (b) taxes, assessments, governmental
charges or levies not yet delinquent or which are being contested in good
faith by appropriate proceedings promptly instituted and diligently
concluded, provided that, any reserve or other appropriate provision as
shall be required in conformity with GAAP shall have been made therefor;
(c) security for payment of workers' compensation or other insurance
incurred in the ordinary course of business; (d) security for the
performance of tenders, contracts (other than contracts for the payment
of money) or leases incurred in the ordinary course of business;
(e) deposits to secure public or statutory obligations incurred in the
ordinary course of business; (f) operation of law in favor of carriers,
warehousemen, mechanics, materialmen, laborers, employees or suppliers
and similar Liens incurred in the ordinary course of business for sums
which are not yet delinquent or are being contested in good faith by
negotiations or by appropriate proceedings which suspend the collection
thereof
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incurred in the ordinary course of business; or (g) security for surety
or appeal bonds incurred in the ordinary course of business;
(3) any Lien existing on the assets of ICON or any Subsidiary Guarantor or
any (including Canadian Restricted Subsidiary that are also Subsidiary
Guarantors) securing the Indebtedness of ICON or any such Subsidiary
Guarantor under the Credit Agreement, provided that the principal amount
of Indebtedness secured by such Lien does not exceed the amount of
Indebtedness permitted to be incurred under clause (1) of the definition
of "Permitted Indebtedness";
(4) any Lien in favor of ICON or a Subsidiary Guarantor;
(5) any Lien securing any Interest Rate Protection Agreements to the extent
such Agreements relate to Indebtedness that is otherwise permitted to be
incurred pursuant to the indenture;
(6) any Lien securing the Notes;
(7) any Liens on assets acquired by ICON or any Restricted Subsidiary after
the ate of the indenture, whether by acquisition of shares, assets or
otherwise, provided that such Lien (a) existed on the date such asset was
acquired, (b) only extends to assets that were subject to such Lien prior
to such acquisition, and (c) was not incurred in anticipation of such
acquisition;
(8) Liens relating to Purchase Money Obligations, provided, however, that
(a) the principal amount of any Indebtedness secured by such Liens shall
not exceed 100% of the applicable purchase price or cost and (b) the Lien
securing such Indebtedness shall be created (A) in the case of any asset
acquisition within 180 days of the closing of such asset acquisition and
(B) in all other cases, in the ordinary course of business, within
90 days of such acquisition and (c) such Lien does not apply to any
assets other than those acquired with such Purchase Money Obligations and
(d) the Indebtedness secured by the Lien was permitted to be incurred
pursuant to clause (8) of the definition of Permitted Indebtedness;
(9) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payment of custom duties in connection with the importation
of goods not yet delinquent, incurred in the ordinary course of business;
provided that, any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(10) Liens upon specific items of inventory or other goods and proceeds of
any Person securing such Person's obligations in respect of bankers
acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods incurred in the ordinary course of business;
(11) [Intentionally Omitted];
(12) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of ICON or any Restricted
Subsidiary relating to such property or assets incurred in the ordinary
course of business;
(13) Liens securing an aggregate of $2.5 million of Indebtedness permitted
to be incurred under the indenture by ICON and any Restricted Subsidiary;
(14) easements, rights-of-way and other similar charges or encumbrances
which were not incurred in connection with the incurrence of Indebtedness
and do not interfere in any material respect with the ordinary conduct of
the business of ICON or any of its Restricted Subsidiaries;
(15) Liens on the assets of Foreign Subsidiaries securing (other than
Canadian Restricted Subsidiaries) Indebtedness of Foreign Subsidiaries
(other than Canadian Restricted
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Subsidiaries) permitted to be incurred under clause (9) under the
definition of "Permitted Indebtedness";
(16) any extension, renewal, substitution or replacement (or successive
extensions, renewals, substitutions or replacements), as a whole or in
part, of any of the Liens referred to in clauses (1), (3), (6), (7),
(15) and (17) of this definition or the Indebtedness secured thereby;
provided that (a) such extension, renewal, substitution or replacement
Lien shall be limited to all or any part of the same property or assets,
now owned or hereafter acquired, that secured the Lien extended, renewed,
substituted or replaced (plus improvements on such property or assets)
and (b) the Indebtedness secured by such Lien (assuming all available
amounts were borrowed) at such time is not increased, except to the
extent permitted under clause (10) of the definition of "Permitted
Indebtedness"; and
(17) Liens on the assets of Canadian Restricted Subsidiaries securing
Indebtedness of Canadian Restricted Subsidiaries permitted to be incurred
under clause (13) under the definition of "Permitted Indebtedness".
Notwithstanding the foregoing, under no circumstances shall any Lien securing
Indebtedness of ICON or any of its Subsidiaries, issued, directly or indirectly,
in exchange for or upon the conversion of any Indebtedness of IHF Holdings or
ICON Fitness be deemed to be a "Permitted Lien".
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, joint-stock company, trust, unincorporated
organization, association, government or any agency or political subdivision
thereof or any other entity.
"Predecessor Security" of any particular Note means every previous Note
evidencing all or a portion of the same debt as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under the provision of the indenture governing
mutilated, destroyed, lost and stolen Notes in exchange for a mutilated security
or in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the
same debt as the mutilated, lost, destroyed or stolen Note.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred stock whether now outstanding, or issued after the date of
the indenture, and including, without limitation, all classes and series of
preferred or preference stock.
"Purchase Money Obligations" of any Person means any Indebtedness (including
Capitalized Lease Obligations) of such Person incurred in the ordinary course of
business for the purpose of financing all or any part of the acquisition price
or the cost of construction or improvement of equipment or property, but only if
such equipment or property is included in "addition to property, plant or
equipment" in accordance with GAAP and only if such equipment or property is not
being purchased as part of an acquisition of any business.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable or
otherwise, is or upon the happening of any event or passage of time, matures or
is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise,
or is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the date that is 91 days after the Stated Maturity of the principal of
the Notes, or is convertible into or exchangeable for debt securities at any
time prior to the date that is 91 days after such Stated Maturity at the option
of the holder thereof; PROVIDED, HOWEVER, that any Capital Stock that would
constitute Redeemable Capital Stock solely because the holders thereof have the
right to require the issuer thereof to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Redeemable Capital Stock if the terms of such Capital Stock provide that such
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issuer may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
"Limitation on Restricted Payments".
"Redemption Date", when used with respect to any Note to be redeemed, in
whole or in part, means the date fixed for such redemption pursuant to the
indenture.
"Redemption Price", when used with respect to any Note to be redeemed, means
the price at which it is to be redeemed pursuant to the indenture.
"Registration Statement" means the Registration Statement as defined in the
Exchange and Registration Rights Agreement.
"Regular Record Date" for the interest payable on any Interest Payment Date
means the January 1 or July 1 (whether or not a Business Day), as the case may
be, next preceding such Interest Payment Date.
"Restricted Subsidiary" means any Subsidiary of ICON that has not been
designated as an Unrestricted Subsidiary; provided that on the date the Notes
are originally issued, all Subsidiaries of ICON shall be Restricted Subsidiaries
of ICON.
"S&P" means Standard and Poor's Rating Group and its successors.
"Securities" has the meaning stated in the first recital of the indenture
and more particularly means any Notes authenticated and delivered under the
indenture. For all purposes of the indenture, the term "Notes" shall include any
Exchange Notes issued and exchanged for any Notes pursuant to the Exchange and
Registration Rights Agreement and the indenture and, for purposes of the
indenture, all Notes and Exchange Notes shall vote together as one series of
Notes under the indenture.
"Securities Act" means the Securities Act of 1933, as amended from time to
time, and the rules and regulations thereunder.
"Securitization Note" means a promissory note of an Unrestricted Subsidiary
or any other Person that is not a Subsidiary of ICON evidencing a line of
credit, which may be irrevocable, from ICON or any Restricted Subsidiary of ICON
in connection with a Securitization Transaction, which note shall be repaid from
cash available to the Unrestricted Subsidiary or such Person other than amounts
required to be established as reserves pursuant to agreements, amounts paid to
investors in respect of interest, principal and other amounts owing to such
investors and amounts paid in connection with the purchase of newly generated
receivables.
"Securitization Transaction" means any transaction or series of transactions
pursuant to which ICON or any of its Restricted Subsidiaries may sell, convey or
otherwise transfer to an Unrestricted Subsidiary or any other Person that is not
a Subsidiary of ICON any accounts receivable (whether now existing or arising or
acquired in the future) of ICON or any of its Restricted Subsidiaries, and any
assets related thereto including, without limitation, all collateral securing
such accounts receivable, all contracts and contract rights and all guarantees
or other obligations in respect of such accounts receivable, proceeds of such
accounts receivable and other assets (including contract rights) which are
customarily transferred in connection with asset securitization transactions
involving accounts receivable.
"Security Register" has the meaning specified in the indenture under
"Registration, Registration of Transfer and Exchange".
"Senior Indebtedness" means the principal of, premium, if any, and interest,
fees and expenses (including, without limitation, post-petition interest at the
rate provided for in the documentation with respect thereto, whether or not
allowed as a claim in bankruptcy, reorganization, insolvency, receivership or
similar proceeding) with respect to any Permitted Indebtedness of ICON and its
Restricted Subsidiaries under the Credit Agreement, including without limitation
any guarantee thereof.
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"Shelf Registration Statement" means the Shelf Registration Statement as
defined in the Exchange and Registration Rights Agreement.
"Significant Subsidiary" means, as of any date, any corporation or
partnership that is a Subsidiary of ICON and that, as of the end of the most
recently completed fiscal year of ICON for which financial statements are
available, was a "significant subsidiary" as defined in Regulation S-X under the
Securities Act and the Exchange Act or that, if acquired after such date, would
have been a "significant subsidiary" as defined therein if it had been acquired
as of such date.
"Specified Senior Indebtedness" means Indebtedness under the Credit
Agreements.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by ICON or any Subsidiary of ICON that
are customary in accounts receivable securitization transactions.
"Stated Maturity" when used with respect to any Indebtedness or any
installment of principal thereof or interest thereon, means the dates specified
in such Indebtedness as the fixed date on which the principal of such
Indebtedness or such installment of principal or interest is due and payable.
"Stockholders Agreement" means the stockholders agreement substantially in
the form attached as an annex to the Exchange Offer and Consent Solicitation
Statement.
"Subordinated Indebtedness" means Indebtedness of ICON or any Restricted
Subsidiary contractually subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which more than
50% of the equity ownership or the Voting Stock of which is at the time
owned, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof) and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantee" means the Guarantee by each Subsidiary Guarantor of
ICON's payment obligations under the indenture and the Notes, executed pursuant
to the provisions of the indenture.
"Subsidiary Guarantors" means each of (1) ICON's Domestic Subsidiaries and
(2) any future Subsidiary that executes a Subsidiary Guarantee in accordance
with the provisions of the Indenture and their respective successors and
assigns.
"Tax Sharing Agreement" means the tax sharing agreement among HF Holdings
and its Subsidiaries, as amended from time to time; PROVIDED that, such
amendments shall not, in aggregate, provide for terms that are materially less
favorable to ICON than those in effect on the Issue Date.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
the indenture until a successor Trustee shall have become such pursuant to the
applicable provisions of the indenture, and thereafter "Trustee" shall mean such
successor Trustee.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution,
but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt,
(2) is not a party to any agreement, contract, arrangement or understanding
with ICON or any Restricted Subsidiary of ICON unless the terms of any
such agreement, contract arrangement
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or understanding are no less favorable to ICON or such Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of ICON,
(3) is a Person with respect to which neither ICON nor any of its Restricted
Subsidiaries has any direct or indirect obligation (a) to subscribe for
additional Capital Stock or (b) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified
levels of operating results, and
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of ICON or any of its Restricted
Subsidiaries.
Notwithstanding the above, ICON and its Restricted Subsidiaries may:
(a) make payments to, provide credit or credit support for or make
Investments in the Unrestricted Subsidiaries to the extent that such
payments or investments in Unrestricted Subsidiaries are in
compliance with the covenant "Limitation on Restricted Payments" and
(b) may make Standard Securitization Undertakings to an Unrestricted
Subsidiary and other Persons, and loans to an Unrestricted Subsidiary
under a Securitization Note, in connection with a Securitization
Transaction with such Unrestricted Subsidiary.
"Vice President", when used with respect to ICON or the Trustee, means any
vice president, whether or not designated by a number or a word or words added
before or after the title "vice president".
"Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
corporation (irrespective of whether or not, at the time, stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency).
"Wholly Owned Subsidiary" of any specified Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Subsidiaries of
such Person or by such Person and one or more Wholly Owned Subsidiaries of such
Person.
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BOOK-ENTRY; DELIVERY AND FORM
The exchange notes initially will be represented by one or more permanent
global certificates in definitive, fully registered form. This global note will
be deposited upon issuance with The Depository Trust Company, New York, New York
and registered in the name of a nominee of the Depository Trust Company.
THE GLOBAL NOTE. We expect that pursuant to procedures established by The
Depository Trust Company
(1) upon the issuance of the global note, The Depository Trust Company or
its custodian will credit, on its internal system, the principal amount
of the individual beneficial interests represented by the global note to
the respective accounts of persons who have accounts with such depository
and
(2) ownership of beneficial interests in the global note will be shown on,
and the transfer of ownership will be effected only through, records
maintained by The Depository Trust Company or its nominee, with respect
to interests of participants, and the records of participants, with
respect to interests of persons other than participants.
Ownership of beneficial interests in the global notes will be limited to
persons who have accounts with The Depository Trust Company or persons who hold
interests through participants.
So long as The Depository Trust Company or its nominee is the registered
owner or holder of the exchange notes, The Depository Trust Company (or the
nominee) will be considered the sole owner or holder of the exchange notes
represented by the global note for all purposes under the indenture. No
beneficial owner of an interest in the global note will be able to transfer that
interest except in accordance with The Depository Trust Company's procedures.
Payments of interest, principal and other amounts due on the global note
will be made to The Depository Trust Company or its nominee as the registered
owner. None of our company, the trustee or any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global note or
for maintaining, supervising or reviewing any records relating to this
beneficial ownership interest.
We expect that The Depository Trust Company or its nominee, upon receipt of
any payment of interest, principal or other amounts due on the global note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the global note as shown on the records of
The Depository Trust Company. We also expect that payments by participants to
owners of beneficial interests in the global note held through such participants
will be governed by standing instructions and customary practice, as is the case
with securities held for the accounts of customers registered in the names of
nominees for those customers. These payments will be the responsibility of the
participants.
Transfers between participants in The Depository Trust Company will be
effected in the ordinary way through The Depository Trust Company's settlement
system in accordance with The Depository Trust Company rules and will be settled
in same day funds.
The Depository Trust Company has advised us that it will take any action
permitted to be taken by a holder of exchange notes, including the presentation
of exchange notes for exchange as described below, only at the direction of a
participant to whose account the Depository Trust Company interests in the
global note are credited. Further, The Depository Trust Company will take action
only as to such portion of the notes as to which the participant has given such
direction. However, if there is an Event of Default under the indenture, the
Depository Trust Company will exchange the global note for certificated notes,
which it will distribute to its participants.
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The Depository Trust Company has advised us as follows: The Depository Trust
Company is a limited purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code and a "Clearing Agency"
registered under to the provisions of Section 17A of the Exchange Act. The
Depository Trust Company was created to hold securities for its participants and
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and other organizations. Indirect access to
the Depository Trust Company system is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
Although the Depository Trust Company has agreed to the foregoing procedures
in order to facilitate transfers of interests in the global note among
participants of the Depository Trust Company, it is under no obligation to
perform those procedures, and those procedures may be discontinued at any time.
Neither our Company's nor the trustee will have any responsibility of the
performance by the Depository Trust Company or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES. If the Depository Trust Company is at any time
unwilling or unable to continue as a depository for the global note and a
successor depository is not appointed by us within 90 days, certificated notes
will be issued in exchange for the global note.
DESCRIPTION OF MATERIAL INDEBTEDNESS
In connection with our September recapitalization, we entered into new
credit facilities of $300 million with a syndicate of banks and financial
services companies. In addition to this summary, you can refer to the copy of
the credit agreement, which is filed as an exhibit to this registration
statement, of which this prospectus is a part.
The new credit facilities consist of a $120 million revolving credit line
("revolver"), a $30 million term loan ("term loan A"), a $80 million term loan
("term loan B"), a $53 million term loan ("term loan C") and a $15 million term
loan ("Intellectual Property loan").
All loans are secured by a first priority security interest in all of the
existing and subsequently acquired assets of our company and our domestic and
Canadian subsidiaries, subject to specified exceptions, and a pledge of 65% of
the stock of our first-tier foreign subsidiaries. The Intellectual Property loan
contains special provisions granting it priority over the other loans on the
proceeds of a liquidation of our patents, trademarks and other intellectual
property. All loans are cross-collateralized and cross-defaulted.
REVOLVER
The revolver consists of a $120 million revolving credit line, which
includes a letter of credit sub-facility of up to $10 million and includes a
swing line sub-facility of up to $10 million. The term of the revolver expires
on August 31, 2004. The terms and conditions include a clean down period to
reduce the outstanding borrowings on the revolver to $25 million or less for a
period of 60 consecutive days or more, during the period from May 1st through
August 31st. In addition, borrowing availability is limited to defined
percentages of qualified assets as specified in the credit agreement.
A letter of credit fee of 2.00% per annum of the maximum amount available to
be drawn under outstanding letters of credit and an unused facility fee of .50%
per annum of the average unused daily balance of the revolver is due monthly. In
addition, a fee of .25% per annum of the average unused
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daily balance for the preceding calendar quarter is due quarterly if such
average unused daily balance exceeded $60 million.
TERM LOAN A
The $30 million term loan A has a 60 month term and amortizes quarterly at
an annual rate of approximately $2.7 million in year one, approximately
$5.5 million in each of years two and three, and approximately $8.2 million in
each of years four and five. The term loan A expires on August 31, 2004.
TERM LOAN B
The $80 million term loan B has a 63 month term and amortizes quarterly at
an annual rate of $1.1 million in each of years one through five and
$74.5 million at maturity. The term loan B expires on November 29, 2004.
TERM LOAN C
The $55 million term loan C has a 66 month term and amortizes quarterly at
an annual rate of $0.4 million in each of years one through five and
$52.9 million at maturity. The term loan C expires on March 1, 2005.
INTELLECTUAL PROPERTY LOAN
The $15 million Intellectual Property loan has a 60 month term and amortizes
quarterly at an annual rate of $3.0 million in each of years one through five.
The Intellectual Property loan expires on August 31, 2004.
At our option, all loans will bear interest at either (a) a floating rate
equal to the "index rate" plus an applicable margin of between 1.5 and 5.5% or
(b) a fixed rate for periods of one, two, three or six months equal to an
interest rate based on the LIBOR rate plus an applicable margin of between 3 and
7%. The index rate is a floating rate equal to the higher of (i) the rate quoted
by The Wall Street Journal as the "base rate on corporate loans at large U.S.
money center commercial banks" and (ii) the federal funds rate plus 0.5%. In
addition, the term loan C accrues pay-in-kind interest at a rate of 5% per annum
capitalized quarterly.
If the revolver is terminated, term loans A, B, C and the Intellectual
Property loan will immediately be due and payable in full. In addition, if the
revolver is terminated or if any or all of the term loans are prepaid (with the
exception of term loan C which cannot be prepaid), prepayment premiums of up to
2% will apply.
Proceeds of the credit facility were used to refinance our existing senior
credit facilities and 13% notes and to fund transaction fees and expenses, and
will be used to provide for general working capital and to fund necessary future
capital expenditures.
The credit agreement contains a number of restrictive covenants that, among
other things, limit or restrict our ability and our subsidiaries' ability to
dispose of assets, incur additional indebtedness, incur guarantee obligations,
prepay other indebtedness, make restricted payments, create liens, make equity
or debt investments, make acquisitions, modify terms of the Indenture, engage in
mergers or consolidations, enter into operating leases or engage in transactions
with affiliates. In addition, we are expected to comply with various financial
ratios and tests, including a maximum capital expenditures test, minimum debt
service coverage ratio, minimum EBITDA, maximum senior leverage ratio and
minimum revenue.
The credit agreement also contains customary events of default including
nonpayment of principal, interest or fees, failure to meet covenants, inaccuracy
of representations and warranties in any material respect, bankruptcy, cross
default to other significant indebtedness, loss of lien perfection, material
judgments and change of ownership or control.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of United States federal income tax consequences
associated with (1) the receipt of exchange notes pursuant to the exchange offer
and (2) the ownership and disposition of the exchange notes. Except where noted,
this summary assumes that you will hold your exchange notes as capital assets.
This summary does not deal with special situations, such as those of dealers in
securities or currencies, traders in securities that elect mark to market
treatment, financial institutions, life insurance companies or tax-exempt
organizations. It also does not deal with U.S. holders whose "functional
currency" is not the U.S. dollar or who hold the notes as a hedge or part of a
straddle or conversion transaction. Furthermore, the discussion below is based
upon the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), administrative rulings and regulations, and judicial decisions as of
the date of this filing. At any time and without prior notice, these authorities
may be repealed, revoked or modified so as to result in federal income tax
consequences different from those discussed below.
IF YOU ARE CONSIDERING THE TENDER OF AN OLD NOTE FOR AN EXCHANGE NOTE, OR
THE PURCHASE, OWNERSHIP OR DISPOSITION OF EXCHANGE NOTES, YOU SHOULD CONSULT
YOUR OWN TAX ADVISOR CONCERNING THE U.S. FEDERAL INCOME TAX CONSEQUENCES AND
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
THE EXCHANGE OFFER
If you exchange an old note for an exchange note under the exchange offer,
this exchange should not constitute a taxable event to you. Therefore:
- you should realize no gain or loss upon the receipt of an exchange note in
exchange for an old note, although you will have ordinary income to the
extent you receive a payment from us as a penalty for the late filing of
this document;
- your holding period in the exchange note should include your holding
period in the old note; and
- your adjusted tax basis of the exchange note should be the same as your
adjusted tax basis of your old note immediately before the exchange.
UNITED STATES HOLDERS
This section will apply to you if you are a U.S. holder. A U.S. holder is,
generally, a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate the income of
which is subject to United States federal income taxation regardless of its
source. A trust is a U.S. holder if a United States court can exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust. A
U.S. holder is also any other person whose worldwide income or gain is otherwise
subject to United States federal income taxation on a net income basis.
INTEREST
QUALIFIED STATED INTEREST. The tax treatment of the semiannual interest
payments made on the exchange notes depends on whether such payments are
"qualified stated interest." The payments of interest on each January 15 and
July 15 will constitute qualified stated interest. If you are a cash method
taxpayer (which includes most individual holders), you must report qualified
stated interest in your income when you receive it. If you are an accrual method
taxpayer, you must report qualified stated interest in your income as it
accrues.
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ORIGINAL ISSUE DISCOUNT. Generally, the exchange notes will be considered
to have been issued with OID if the old notes for which the exchange notes are
exchanged were issued with OID. The old notes will be considered to have been
issued with OID if either the 13% notes or a substantial amount of the old notes
were "traded on an established market", within the meaning of the Code and
applicable Treasury regulations, at any time during the sixty day period that
ended thirty days after the 13% notes were exchanged for the old notes, and the
fair market value of the old notes or of the 13% notes, as the case may be, were
determined to be below the face amount of such notes. The applicable Treasury
regulations are complex and highly detailed in defining "traded on an
established market." For example, the fact that old notes or 13% notes were
purchased and sold during the relevant period would not, by itself, constitute
trading on an established market. Rather, the notes must be listed on an
exchange, appear on a "quotation medium," or satisfy other requirements. It is
our belief, and we intend to take the position that, neither the 13% notes nor a
substantial amount of the old notes were "traded on an established market"
within the meaning of the relevant Code provisions and Treasury regulations
during the relevant time period. We, and our agents, have undertaken a limited
amount of investigation regarding whether the notes were so traded and it is
possible that the IRS may disagree with our conclusion. If the IRS were to take
a contrary position and prevail, special OID rules would apply to holders of
exchange notes or old notes.
DETERMINING AMOUNT OF OID. The amount of OID, if any, on an exchange note
is its "stated redemption price at maturity" minus its "issue price." The stated
redemption price at maturity of an exchange note is equal to its face amount.
The "issue price" of the exchange notes will be the same as the issue price
of the old notes. The issue price of the old notes depends on whether the 13%
notes or a substantial amount of the old notes were "traded on an established
market" at any time during the sixty day period ending thirty days after the
issue date. If a substantial amount of the old notes were so traded on an
established market, the issue price of an old note will be the fair market value
of such note as of the issue date. If a substantial amount of the old notes were
not so traded, but the 13% notes were "traded on a established market" the issue
price of an old note would be the fair market value as of the issue date of the
13% note for which it was exchanged.
If neither the 13% notes nor a substantial amount of the old notes were so
traded, which we believe is the case, the issue price for each old note is its
face amount. If the issue price of an old note is its face amount, it was not
issued with OID.
ACCRUAL OF OID. OID on an exchange note must be included by its holder as
ordinary income over the life of the note. Thus, you must include OID (if there
is any) in income as the OID accrues, even if you are a cash method taxpayer.
Thus, you are required to report OID income, and in some cases pay tax on that
income, before you receive the cash that corresponds to that income.
OID accrues on a note on a "constant yield" method. This method takes into
account the compounding of interest. The accruals of OID on a note will
generally be less in the early years and more in the later years. The amount of
OID that you must accrue will be reduced if you paid an "acquisition premium"
for an exchange note or for an old note that you exchanged for an exchange note.
You will have paid an acquisition premium if you purchased an old note or an
exchange note in a transaction other than our exchange of old notes for 13%
notes or this exchange offer, and the amount you paid for such note exceeded the
adjusted issue price of such note at the time you bought it. If you have
acquisition premium on your exchange note, you should consult your tax advisor.
Your tax basis in an exchange note received pursuant to this exchange offer
is your adjusted issue price in the old note that you exchanged. It increases by
any OID (but not qualified stated interest) that you report as income. It
decreases by any principal payments or payments of OID you receive on the note.
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AHYDO RULES. If the old notes were issued with significant OID, they and
the exchange notes for which they are exchanged would be "applicable high yield
discount obligations" ("AHYDOs"), and thus would be subject to special rules.
Under these AHYDO rules, a portion of the amount of OID that you would have to
accrue may, if you are a corporation, be characterized as a dividend for
purposes of securing a dividend received deduction. If you are a corporation,
you should consult your tax advisor on this point. The AHYDO rules would also
defer our ability to take a deduction for a portion of the OID that accrues on
the exchange notes, and likely deny our ability to take a deduction for another
portion of the OID.
OID AND CANCELLATION OF INDEBTEDNESS INCOME. In the event the old notes
were determined to have been issued with OID, we could be treated as having
recognized additional cancellation of indebtedness income as of the date that
the 13% notes were exchanged for the old notes. As noted above under the
discussion of original issue discount, we do not believe that the old notes were
issued with OID. Additionally, we believe that if additional cancellation of
indebtedness income were realized, substantially all of any such additional
income would be offset by available net operating loss carryforwards unless, as
discussed in "Risk Factors", such net operating loss carryforwards were reduced
as a result of the IRS, in connection with its audit of us, successfully
disallowing deductions previously claimed by us.
If the old notes were determined to have been issued with OID, all or a
portion of the cancellation of indebtedness income that we recognized would be
(prior to being offset by any available net operating loss carryforwards)
excluded from our income to the extent that we were, as of immediately prior to
the issuance of the old notes for the 13% notes, insolvent. If this so-called
"insolvency exception" were to apply to reduce the amount of cancellation of
indebtedness income required to be reported by us, we would be required, under
applicable tax rules, to reduce, as of the beginning of our next taxable year
and to the extent of such excluded cancellation of indebtedness, our remaining
net operating loss carryforwards. If the amount of excluded cancellation of
indebtedness income were greater than the amount of our remaining net operating
loss carryforwards, as of the beginning of our next taxable year, we would have
to reduce our tax basis in our assets by the remaining amount of such excluded
income, but not below the aggregate amount of our liabilities, as determined
immediately after the restructuring. This could materially adversely affect our
financial condition because, if we subsequently sold assets, we would recognize
more taxable gain than we would have absent this required reduction in tax
basis.
MARKET DISCOUNT
Generally, you may be subject to the "market discount" rules if either
(1) you exchanged a 13% note for an old note and the 13% note that you exchanged
had market discount, or (2) you acquired an old note other than in exchange for
a 13% note and the amount you paid for the old note was less than its "revised
issue price." The revised issue price is the sum of the note's issue price and
all OID includible in the income of holders prior to your acquisition of the
note. Under a special rule, if the amount of "market discount" is less than a DE
MINIMIS amount, the market discount rules will not apply.
If you are subject to the market discount rules with respect to an exchange
note, gain that you realize upon the disposition of the note will be
characterized as ordinary income to the extent of the market discount that has
not previously been included in income and that has accrued at the time of
disposition. Also, if you incur or continue indebtedness in order to purchase or
carry the note, you may be required to defer the deduction of the interest
expense payable on such indebtedness.
If you are subject to the market discount rules, you should consult your tax
advisor.
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SALE AND RETIREMENT OF NOTES
Upon the sale or retirement of an exchange note, you will recognize gain or
loss equal to the difference between the amount realized upon the sale or
retirement and your adjusted tax basis in the note. Except with respect to
market discount accrued and unpaid interest, such gain or loss generally will be
capital gain or loss, and will be long-term capital gain or loss if you held
such note for more than one year. The deductibility of capital losses is subject
to limitations.
NON-UNITED STATES HOLDERS
This section applies to you if you are a non-U.S. holder. A non-U.S. holder
is any holder of an exchange note who is a nonresident alien individual or a
foreign corporation, foreign partnership or an estate, trust or any other person
that is not a U.S. Holder as defined in the preceding section.
Subject to the discussion of backup withholding below:
(1) payments of principal, premium, if any, and interest by us or any of our
paying agents to you on an exchange note will not be subject to United
States federal withholding tax if you are the beneficial owner of the note
and, in the case of interest,
(a) you do not actually or constructively own 10% or more of the total
combined voting power of all of our classes of stock entitled to vote,
(b) you are not a controlled foreign corporation that is related to us
through stock ownership,
(c) you are not a bank that holds the note pursuant to a loan agreement
entered into in the ordinary course of your trade or business, and
(d) either:
(A) you certify to us or our agent, under penalties of perjury, that you
are not a U.S. holder and provide your name and address; or
(B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course
of its trade or business and holds the exchange note certifies to us
or our agent under penalties of perjury that this statement has been
received from you by it or by a financial institution between it and
you and furnishes us or our agent with a copy thereof;
(2) you will not be subject to United States federal withholding tax on any gain
realized on the sale or exchange of an exchange note; and
(3) an exchange note held by an individual who at death is not a citizen or
resident of the United States will not be includible in the individual's
gross estate for purposes of the United States federal estate tax as a
result of the individual's death if
(a) the individual did not actually or constructively own 10% or more of the
total combined voting power of all classes of our stock entitled to vote,
and
(b) the income on the note would not have been effectively connected with a
United States trade or business of the individual at the individual's
death.
New regulations that are generally effective with respect to payments made
after December 31, 2000, will provide alternative methods for satisfying the
certification requirement described in clause (1)(d) above. We urge you to
consult their tax advisor regarding these regulations.
106
<PAGE>
BACKUP WITHHOLDING AND INFORMATION REPORTING
UNITED STATES HOLDERS
You must comply with information reporting rules unless an exemption
applies. The information reporting rules require you to provide us (or, if you
hold your notes through a securities intermediary such as a broker, such
intermediary) with your taxpayer identification number. We (or the intermediary)
will use your taxpayer identification number in reporting information to the
IRS. You must also comply with other IRS information reporting requirements. If
you fail to comply with the IRS's information reporting requirements, the
"backup withholding" rules require us (or the intermediary) to withhold 31% of
all amounts payable to you on the notes (including principal payments). Any
amounts so withheld may be used by you as a credit against your U.S. federal
income tax liability.
All individual U.S. holders are subject to the information reporting
requirements and backup withholding rules. Some U.S. holders, including all
corporations, tax-exempt organizations, and individual retirement accounts, are
exempt.
NON-UNITED STATES HOLDERS
Principal and interest payments received by non-U.S. holders will be
automatically exempt from the usual information reporting and backup withholding
rules if you provide the tax certifications needed to avoid withholding tax on
interest, as described above. This exemption, however, does not apply if the
recipient of the applicable certification knows the certification is false.
Also, interest payments made to you will be reported to the IRS.
Sale proceeds that you receive on the sale of a note through a broker may be
subject to information reporting or backup withholding or both if you are not
eligible for an exemption. In particular, information reporting and backup
withholding may apply if you use the U.S. office of a broker, and information
reporting (but not backup withholding) may apply if you use the foreign office
of a broker that has connections to the U.S. You should consult your tax advisor
concerning information reporting and backup withholding on a sale.
PLAN OF DISTRIBUTION
Each holder desiring to participate in the exchange offer will be required
to represent, among other things, that
(1) it is not an "affiliate" (as defined in Rule 405 of the Securities Act) of
us,
(2) it is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a
distribution of the exchange notes, and
(3) it is acquiring the exchange notes in the ordinary course of its business.
A holder unable to make the above representations is referred to as a
restricted holder. A restricted holder will not be able to participate in the
exchange offer, and may only sell its old notes pursuant to a registration
statement containing the selling securityholder information required by Item 507
of Regulation S-K of the Securities Act, or pursuant to an exemption from the
registration requirement of the Securities Act.
Each participating broker-dealer is required to acknowledge in the letter of
transmittal that it acquired the old notes as a result of market-making
activities or other trading activities and that it will deliver a prospectus in
connection with the resale of such exchange notes. Based upon interpretations by
the staff of the Securities and Exchange Commission, we believe that exchange
notes issued pursuant to the exchange offer to participating broker-dealers may
be offered for resale, resold, and
107
<PAGE>
otherwise transferred by a participating broker-dealer upon compliance with the
prospectus delivery requirements, but without compliance with the registration
requirements, of the Securities Act. We have agreed that for a period of
30 days following consummation of the exchange offer, we will make this
prospectus available to participating broker-dealers for use in connection with
any such resale. During such period of time, delivery of this prospectus, as it
may be amended or supplemented, will satisfy the prospectus delivery
requirements of a participating broker-dealer engaged in market making or other
trading activities.
Based upon interpretations by the staff of the Securities and Exchange
Commission, we believe that exchange notes issued pursuant to the exchange offer
may be offered for resale, resold and otherwise transferred by their holder,
other than a participating broker-dealer, without compliance with the
registration and prospectus delivery requirements of the Securities Act.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by participating broker-dealers for
their own account pursuant to the exchange offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the exchange notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such participating broker-dealer and /or the purchasers of
any such exchange notes. Any participating broker-dealer that resells exchange
notes that were received by it for its own account pursuant to the exchange
offer and any broker or dealer that participates in a distribution of such
exchange notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of exchange notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a participating broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any brokers or dealers and will indemnify
holders of the notes, including any broker-dealers, against liabilities,
including liabilities under the Securities Act, as set forth in the registration
rights agreement.
LEGAL MATTERS
The validity of the exchange notes will be passed upon for ICON by Willkie
Farr & Gallagher, New York, New York.
EXPERTS
The consolidated financial statements of ICON as of May 31, 1999 and 1998
and for each of the three years in the period ended May 31, 1999, included in
this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-4 to register
this exchange offer. This prospectus, which forms part of the registration
statement, does not contain all of the information included in that registration
statement. For further information about ICON and the notes offered in this
prospectus, you should refer to the registration statement and its exhibits.
108
<PAGE>
We are not currently subject to the periodic reporting and other
informational requirements of the Securities and Exchange Act of 1934. Upon the
effectiveness of the registration statement, we will become subject to the
periodic reporting and other information requirements of the Exchange Act, and
in accordance therewith, will be required to file periodic reports and other
information with the SEC.
You may read and copy any document we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the Public
Reference Room. We file our SEC materials electronically with the SEC, so you
can also review our filings by accessing the web site maintained by the SEC at
http://www.sec.gov. This site contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC.
Our principal executive offices are located at 1500 South, 1000 West, Logan,
Utah 84321. Our telephone number is (435) 750-5000.
109
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations and Comprehensive
Loss...................................................... F-4
Consolidated Statements of Stockholder's Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
Financial Statement Schedule II............................. F-38
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
ICON Health & Fitness, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive loss, of stockholder's
equity (deficit) and of cash flows present fairly, in all material respects, the
financial position of ICON Health & Fitness, Inc. and its subsidiaries at
May 31, 1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended May 31, 1999 in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consoldiated financial statements.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As described in Notes 2, 16, 17 and 18 to the consolidated financial
statements, on September 27, 1999, the Company restructured its capital
structure and entered into a new $300 million credit facility.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Salt Lake City, Utah
September 27, 1999
F-2
<PAGE>
ICON HEALTH & FITNESS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 26, MAY 31,
------------ ---------------------
2000 1999 1998
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 9,671 $ 4,275 $ 3,892
Accounts receivable, net................................. 179,302 116,468 124,301
Inventories, net......................................... 119,805 106,426 121,466
Deferred income taxes.................................... 1,085 821 11,177
Other assets............................................. 10,389 6,311 6,202
Income taxes receivable.................................. -- 118 781
--------- --------- ---------
Total current assets................................... 320,252 234,419 267,819
Property and equipment, net................................ 44,614 45,277 48,819
Receivable from parent..................................... -- -- 2,362
Trademarks, net............................................ 20,730 22,859 17,244
Deferred income taxes...................................... 4,357 5,763 4,927
Other assets............................................... 24,593 23,592 21,958
--------- --------- ---------
$ 414,546 $ 331,910 $ 363,129
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt........................ $ 8,441 $ 7,227 $ 6,051
Accounts payable......................................... 113,258 95,665 83,965
Interest payable......................................... 2,662 5,673 6,596
Accrued expenses......................................... 14,705 16,893 18,090
Income taxes payable..................................... 3,453 939 249
--------- --------- ---------
Total current liabilities.............................. 142,519 126,397 114,951
--------- --------- ---------
Long-term debt............................................. 284,339 253,352 268,495
--------- --------- ---------
Commitments and contingencies (Notes 13 and 18)............ -- -- --
Stockholder's equity (deficit):
Common stock and additional paid-in capital.............. 204,155 163,819 166,186
Receivables from officers and Parent..................... (2,200) (656) (656)
Accumulated other comprehensive loss..................... (1,432) (1,017) (547)
Accumulated deficit...................................... (212,835) (209,985) (185,300)
--------- --------- ---------
Total stockholder's deficit............................ (12,312) (47,839) (20,317)
--------- --------- ---------
$ 414,546 $ 331,910 $ 363,129
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
ICON HEALTH & FITNESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------- YEAR ENDED MAY 31,
FEBRUARY 26, FEBRUARY 27, ------------------------------
2000 1999 1999 1998 1997
------------ ------------ -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................... $570,843 $558,236 $710,249 $749,313 $836,162
Cost of sales........................... 414,576 401,790 514,018 535,646 583,747
Cost of sales--amortization of step-up
in HealtherRider and ICON of Canada
inventory............................. -- -- -- 330 14,009
-------- -------- -------- -------- --------
Gross profit............................ 156,267 156,446 196,231 213,337 238,406
-------- -------- -------- -------- --------
Operating expenses:
Selling............................... 70,531 78,510 107,621 120,752 132,392
Research and development.............. 6,021 5,576 7,715 7,777 7,620
General and administrative............ 45,981 39,950 53,414 60,912 56,689
Weider settlement..................... -- -- -- -- 16,583
HealthRider integration costs......... -- -- -- -- 4,880
-------- -------- -------- -------- --------
Total operating expenses................ 122,533 124,036 168,750 189,441 218,164
-------- -------- -------- -------- --------
Income from operations.................. 33,734 32,410 27,481 23,896 20,242
Interest expense........................ (25,611) (24,622) (33,056) (35,058) (33,627)
Amortization of deferred financing
fees.................................. (1,853) (4,531) (6,992) (4,806) (3,058)
Other income............................ -- -- -- 1,223 700
Other expense........................... -- -- (34) (686) (193)
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item.................... 6,270 3,257 (12,601) (15,431) (15,936)
Provision for (benefit from) income
taxes................................. 7,365 1,069 12,084 (5,897) (3,988)
-------- -------- -------- -------- --------
Loss before extraordinary item.......... (1,095) 2,188 (24,685) (9,534) (11,948)
Extraordinary loss on extinguishment of
debt net of income tax benefit of
$1,122................................ (1,755) -- -- -- --
-------- -------- -------- -------- --------
Net (loss) income..................... (2,850) 2,188 (24,685) (9,534) (11,948)
Other comprehensive loss comprised of
foreign currency translation
adjustment............................ (415) (428) (470) (41) (892)
-------- -------- -------- -------- --------
Comprehensive loss.................... $ (3,265) $ 1,760 $(25,155) $ (9,575) $(12,840)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
ICON HEALTH & FITNESS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLE FROM OTHER TOTAL
------------------- PAID-IN OFFICERS AND COMPREHENSIVE ACCUMULATED STOCKHOLDER'S
SHARES VALUE CAPITAL PARENT INCOME (LOSS) DEFICIT DEFICIT
-------- -------- ---------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1996........ 1,000 $ -- $166,176 $ (758) $ 386 $(163,818) $ 1,986
Proceeds from exercise of
common stock options and
contribution of capital by
IHF Holdings, Inc............ -- -- 8 -- -- -- 8
Loan balances forgiven......... -- -- -- 102 -- -- 102
Other comprehensive loss....... -- -- -- -- (892) -- (892)
Net loss....................... -- -- -- -- -- (11,948) (11,948)
------ ------ -------- ------- ------- --------- --------
Balance at May 31, 1997........ 1,000 -- 166,184 (656) (506) (175,766) (10,744)
Proceeds from exercise of
common stock options and
contribution of capital by
IHF Holdings, Inc............ -- -- 2 -- -- -- 2
Other comprehensive loss....... -- -- -- -- (41) -- (41)
Net loss....................... -- -- -- -- -- (9,534) (9,534)
------ ------ -------- ------- ------- --------- --------
Balance at May 31, 1998........ 1,000 -- 166,186 (656) (547) (185,300) (20,317)
Other comprehensive loss....... -- -- -- -- (470) -- (470)
Cancellation of receivable from
parent....................... -- -- (2,367) -- -- -- (2,367)
Net loss....................... -- -- -- -- -- (24,685) (24,685)
------ ------ -------- ------- ------- --------- --------
Balance at May 31, 1999........ 1,000 -- 163,819 (656) (1,017) (209,985) (47,839)
Cash contribution of capital
from Parent (net of financing
fees of $4,263)
(unaudited).................. 35,625 35,625
Warrants of HF Holdings granted
to management (unaudited).... 3,175 3,175
Loan balances forgiven
(unaudited).................. (656) 656 --
Warrants of HF Holdings granted
to holders of 13% Notes
(unaudited).................. 2,192 2,192
Receivable from Parent
(unaudited).................. (2,200) (2,200)
Other comprehensive loss
(unaudited).................. (415) (415)
Net loss (unaudited)........... (2,850) (2,850)
------ ------ -------- ------- ------- --------- --------
Balance February 26, 2000
(unaudited).................. 1,000 $ -- $204,155 $(2,200) $(1,432) $(212,835) $(12,312)
====== ====== ======== ======= ======= ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
ICON HEALTH & FITNESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------- MAY 31,
FEBRUARY 26, FEBRUARY 27, -------------------------------
2000 1999 1999 1998 1997
------------- ------------- --------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................. $ (2,850) $ 2,188 $ (24,685) $ (9,534) $(11,948)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision (benefit) for deferred taxes........... 4,040 (1,081) 9,521 (8,599) 1,635
Depreciation and amortization.................... 12,097 13,214 17,422 16,658 13,351
Amortization of deferred financing fees and debt
discount....................................... 4,842 4,742 7,272 5,045 3,264
Non-cash employee compensation expense........... -- -- -- -- 296
Non-cash equity grant to management.............. 3,175 -- -- -- --
Extraordinary loss on extinguishment of debt..... 1,755 -- -- -- --
Amortization of inventory step-up................ -- -- -- 330 14,009
Loss on disposal of property and equipment....... -- -- -- 333 67
Gain on barter transaction....................... -- -- -- -- (2,095)
Changes in operating assets and liabilities:
Accounts receivable............................ (62,833) (60,567) 7,833 68,524 (46,862)
Inventories.................................... (13,379) 1,166 15,040 42 (1,465)
Income taxes receivable/payable................ (98) 683 1,353 5,732 510
Other assets................................... (3,282) (14,206) (5,317) (606) (6,466)
Accounts payable and accrued expenses.......... 12,395 21,492 10,503 (29,932) (2,401)
Interest payable............................... -- -- (923) (376) 405
-------- -------- --------- -------- --------
Net cash provided by (used in) operating
activities....................................... (44,138) (32,369) 38,019 47,617 (37,700)
-------- -------- --------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sale of building..................... -- (9,054) -- 18,250 --
Purchase of property and equipment................. (10,093) -- (11,593) (11,825) (16,039)
Purchase of intangibles and trademarks............. (675) -- (8,474) -- --
Purchase of HealthRider............................ -- -- -- -- (25,800)
Purchase of Weider Sports and CanCo................ -- -- -- -- (11,058)
Receivable from Parent............................. (2,200) -- -- -- --
-------- -------- --------- -------- --------
Net cash provided by (used in) investing
activities....................................... (12,968) (9,054) (20,067) 6,425 (52,897)
-------- -------- --------- -------- --------
FINANCING ACTIVITIES:
Borrowings (payments) on revolving credit facility,
net.............................................. (78,274) 45,939 223,121 (36,302) 89,484
Payments on other long-term debt................... (667) -- (237,369) (16,418) (6,341)
Proceeds from issuance of common stock............. -- -- -- 2 8
Receivable from parent............................. -- -- (5) (55) (2,307)
Proceeds from new term notes....................... 180,497 -- -- -- --
Payments on old term notes......................... (21,271) -- -- -- --
Contributed capital from parent.................... 40,000 -- -- -- --
Payments for financing fees--equity................ (4,377) -- -- -- --
Payments to 13% noteholders........................ (39,408) -- -- -- --
Payments for financing fees--debt.................. (13,583) -- (2,846) (2,896) (3,023)
-------- -------- --------- -------- --------
Net cash provided by (used in) financing
activities....................................... 62,917 45,939 (17,099) (55,669) 77,821
-------- -------- --------- -------- --------
Effect of exchange rate changes on cash.............. (415) (428) (470) (41) (977)
-------- -------- --------- -------- --------
Net increase (decrease) in cash...................... 5,396 4,088 383 (1,668) (13,753)
Cash, beginning of period............................ 4,275 3,892 3,892 5,560 19,313
-------- -------- --------- -------- --------
Cash, end of period.................................. $ 9,671 $ 7,980 $ 4,275 $ 3,892 $ 5,560
======== ======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS
BASIS OF PRESENTATION--The consolidated financial statements include the
accounts of ICON Health & Fitness Inc. and its wholly-owned subsidiaries ("Icon
Health" or "the Company"). Icon Health was formerly known as Weslo, Inc. and its
wholly-owned subsidiary, ProForm Fitness Products, Inc. and its wholly-owned
subsidiaries, and American Physical Therapy, Inc. At May 31, 1999, Icon Health
was a wholly-owned subsidiary of IHF Holdings, Inc. ("IHF Holdings"), a
wholly-owned subsidiary of ICON Fitness Corporation ("ICON Fitness"), a
wholly-owned subsidiary of IHF Capital, Inc. ("IHF Capital").
DESCRIPTION OF BUSINESS--The Company is principally involved in the
development, manufacturing and distribution of home fitness equipment. The
Company's revenues are derived from the sale of various aerobic and anaerobic
fitness product lines in domestic and foreign markets. Because product life
cycles can be short in the fitness industry, the Company emphasizes new product
innovation and product repositioning. The Company primarily sells its products
to retailers and, to a limited extent, to end-users through direct response
advertising efforts and retail outlets.
UNAUDITED FINANCIAL INFORMATION--In the opinion of management, the
accompanying unaudited financial statements contain all adjustments (consisting
only of normal recurring items) necessary to present fairly the financial
position of the Company as of February 26, 2000 and the results of its
operations and its cash flows for the nine-month periods ended February 26, 2000
and February 27, 1999. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the SEC's rules
and regulations. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year.
2. RECENT DEVELOPMENTS
The Company incurred a net loss of $24,685,000 for the year ended May 31,
1999, and as of May 31, 1999 had an accumulated deficit of $209,985,000. The
Company was unable to make the interest payment on the 13% Senior Subordinated
Notes due on July 15, 1999 and was in violation of certain financial covenants
of its Credit Agreement.
To provide ongoing funding for the Company's operations and debt repayment
requirements, on September 27, 1999, the Company consummated a troubled debt
restructuring of its capital structure (the "Restructuring") and to refinance
its existing bank credit facility (Notes 17 and 18). The Company believes that
the new capital structure, the new credit facility and cash provided from
operations will be sufficient to fund its operations and debt repayment
requirements during the next year. There can be no assurance that this plan will
result in a successful reorganization of the Company.
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--All significant intercompany accounts and
transactions have been eliminated in the consolidation of the Company.
CASH--At May 31, 1999, substantially all of the Company's cash is held by
two banks located in Utah. The Company does not believe that as a result of this
concentration it is subject to any unusual financial risk beyond the normal risk
associated with commercial banking relationships.
F-7
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES--Inventories consist primarily of raw materials (principally
parts and supplies) and finished goods, and are valued at the lower of cost or
market. Cost is determined using standard costs which approximate the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT--Property and equipment is stated at cost and
depreciated using the straight-line method over the estimated useful lives of
the respective assets. Expenditures for renewals and improvements are
capitalized, and maintenance and repairs are charged to expense as incurred.
TRADEMARKS--During the fiscal year ended May 31, 1999, the Company acquired
certain assets of NordicTrack, the majority of which was a trademark recorded at
$6,664,000. During the fiscal year ended May 31, 1997 the Company acquired
HealthRider (Note 4), Weider Sports and CanCo (Note 14). In connection with
these acquisitions, the Company recorded trademarks of $12,024,000 and
$6,915,000 respectively.
These assets are being amortized on a straight-line basis over 20 years. At
May 31, 1999 and 1998 trademarks are net of accumulated amortization of
$2,641,950 and $1,695,000 respectively.
LONG-LIVED ASSETS--Long-lived assets are periodically reviewed for
impairment in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Assets to Be Disposed Of". SFAS 121 requires the assessment of whether there has
been an impairment whenever events or circumstances indicate that the carrying
amount of long-lived assets may not be recoverable. The carrying value of a
long-lived asset is considered impaired when the anticipated cumulative
undiscounted cash flow from that asset is less than its carrying value. In that
event, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the long-lived asset, which is generally based
on discounted cash flows. As a result of its review, the Company does not
believe that any impairment currently exists related to its long-lived assets.
DEFERRED FINANCING COSTS--The Company deferred certain debt issuance costs
relating to the establishment of the Credit Agreement (Note 8) and the issuance
of the 13% Senior Subordinated Notes (the "Notes"). These costs are capitalized
in other long-term assets and are being amortized using the straight-line method
for costs associated with the Credit Agreement and the effective interest method
for costs associated with the Notes. These deferred costs will be written off as
part the Restructuring transaction (Note 17). In addition, the Company deferred
certain costs relating to the Company's Restructuring transaction (Note 17).
Amortization will commence in fiscal year 2000.
ADVERTISING COSTS--The Company expenses the costs of advertising as
incurred, except for direct response advertising, which is capitalized and
amortized over its expected period of future benefit, generally twelve months.
Direct response advertising costs consist primarily of costs to produce
infomercials for the Company's products. At May 31, 1999 and 1998, $0 and
$273,000, respectively, were included in other long-term assets. For the fiscal
years ended May 31, 1999, 1998 and 1997, total advertising expense was
approximately $11,249,000, $24,637,000, and $31,810,000, respectively.
REVENUE RECOGNITION--The Company recognizes revenue upon the shipment of
product to the customer. Allowances are recognized for estimated returns,
discounts, advertising programs and warranty costs associated with these sales.
Finance charges under the Company's payment plans are recognized as other
income.
F-8
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME--At the beginning of fiscal year 1999, the Company
adopted SFAS No. 130 "Reporting Comprehensive Income." SFAS 130 establishes
standards for reporting and presentation of comprehensive income and its
components. SFAS 130 requires that all items that are required to be recognized
under accounting standards as comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. In accordance with the provisions of SFAS 130, the Company has
presented the components of other comprehensive income (loss) in its
consolidated statements of operations and comprehensive loss. The financial
statements for all prior periods have been restated to conform to requirements
of SFAS 130.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially expose
the Company to concentration of credit risk include trade accounts receivable.
To minimize this risk, ongoing credit evaluations of customers' financial
condition are performed and reserves are maintained; however, collateral is not
required. A significant portion of the Company's sales are made to Sears Roebuck
("Sears"). Sears accounted for approximately 37%, 33% and 29% of total sales for
the fiscal years ended May 31, 1999, 1998 and 1997, respectively. Accounts
receivable from Sears accounted for approximately 30% and 32% of gross accounts
receivable at May 31, 1999 and 1998, respectively.
RESEARCH AND DEVELOPMENT COSTS--Research and product development costs are
expensed as incurred. Research and development activities include the design of
new products and product enhancements, and are performed by both internal and
external sources.
INCOME TAXES--The Company accounts for income taxes utilizing the asset and
liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes".
SFAS 109 requires the Company to record in its consolidated balance sheet
deferred tax assets and liabilities for expected future tax consequences of
events that have been recognized in different periods for financial statements
versus tax returns. If appropriate, deferred tax assets are reduced by a
valuation allowance which reflects expectations of the extent to which such
assets will be realized.
Currently, the Company is included as part of the consolidated tax return
filed by IHF Capital. The income tax provision for the Company has been prepared
on a separate company basis.
FOREIGN OPERATIONS--Assets and liabilities of the Company's European and
Canadian subsidiaries are translated into U.S. dollars at the applicable rates
of exchange at each period end. The Company's foreign transactions are primarily
denominated in Canadian dollars, British pounds, German marks, French francs and
Italian lira, and transactions with foreign entities that result in income and
expense for the Company are translated at the average rate of exchange during
the period. Translation gains and losses are reflected as a separate component
of other comprehensive income (loss). Transaction gains and losses are recorded
in the consolidated statements of operations and comprehensive loss and were not
material in the fiscal years ended May 31, 1999, 1998 and 1997. In the fiscal
years ended May 31, 1999, 1998 and 1997, the Company's foreign operations
represented less than 10% of the Company's net sales and effects of exchange
rate changes have not had a material impact on the Company's earnings.
FOREIGN CURRENCY HEDGES--The Company enters into foreign currency forward
exchange contracts to hedge foreign currency transactions on a continuing basis
for periods consistent with its anticipated or committed foreign currency
exposures on purchases in Canadian dollars. The effect of this practice is to
minimize the impact of foreign exchange rate movements on the Company's
operating results. The Company's hedging activities do not subject the Company
to significant exchange rate risk because
F-9
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
gains and losses on these contracts offset losses and gains on the assets and
transactions being hedged. Unrealized gains and losses on these contracts are
deferred and accounted for as part of the hedged transactions. Cash flows from
these contracts are classified in the consolidated statement of cash flows in
the same category as the hedged transactions. As of May 31, 1999 and 1998, the
Company had approximately $0 and $32,000,000 Canadian, respectively, of open
forward exchange contracts to sell Canadian dollars throughout fiscal years
May 31, 2000 and 1999, respectively. The fair value of these forward exchange
contracts are based on quoted market prices. At May 31, 1999, the estimated
unrealized loss on outstanding forward exchange contracts was $0 and at May 31,
1998 the estimated unrealized loss was $459,000. During the fiscal years ended
May 31, 1999 and 1998, the Company recognized losses of $0 and $449,000,
respectively, and in the fiscal year ended May 31, 1997 the Company recognized
gains of $149,000 upon settlement of foreign currency translations denominated
in Canadian dollars.
BARTER TRANSACTION--Included in other current and other long-term assets at
May 31, 1999 and 1998 are barter credits of $4,484,000 which were recorded in
connection with a barter agreement the Company entered into during the fiscal
year ended May 31, 1997. The Company recorded the barter credit at the fair
value of the inventory exchanged and recorded a gain of $2,095,000 in connection
with the transaction. The Company intends to use this asset primarily to
purchase advertising through August 31, 2003, the expiration date of the barter
credits.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The following methods and assumptions
were used to estimate the fair value disclosures for financial instruments:
Senior Notes--based on quoted market prices and the remaining long-term
debt.
Other long-term debt--fair value approximates carrying value since such
debt is primarily variable rate debt.
The carrying amounts and fair values of long-term debt at May 31, 1999 and
1998 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
13% Senior Subordinated Notes....................... $100,024 $ 70,875 $ 99,743 $108,084
Other long-term debt................................ 160,555 160,555 174,803 174,803
</TABLE>
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses for the period presented. Actual results could differ from
those estimates.
RECLASSIFICATIONS--Certain balances of the prior year have been reclassified
to conform to the current year's presentation. These reclassifications had no
effect on net income or total assets.
F-10
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. HEALTHRIDER ACQUISITION
On August 16, 1996, the Company: (i) purchased substantially all the assets
of HealthRider, Inc. ("HealthRider"), a distributor of aerobic home fitness
equipment, for approximately $16,800,000 and assumed (or refinanced)
substantially all of the liabilities of HealthRider (including $700,000 of fees
and expenses related to the acquisition); (ii) purchased certain related
manufacturing assets of Parkway Manufacturing, Inc., ("Parkway"), including
Parkway's contract to manufacture and supply upright rowers to HealthRider, for
approximately $10,100,000 (including the payment of $1,000,000 of trade payables
owed to Parkway by HealthRider); and (iii) purchased the minority interest of
HealthRider's European subsidiary for approximately $1,400,000; (of which
$1,300,000 was paid in cash and $100,000 was paid in inventory) (together, the
"HealthRider Acquisition").
The HealthRider Acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price plus direct costs of the acquisition
were allocated to the assets acquired and liabilities assumed based on their
relative fair values as of the closing date. The results of operations of
HealthRider were consolidated with the Company's results from August 16, 1996 to
September 3, 1997, when HealthRider was merged into the Company.
The unaudited pro forma summary presents the consolidated results of
operations assuming that the HealthRider Acquisition had occurred on June 1,
1996. The results of HealthRider for the month ended June 30, 1996 have been
utilized in preparing the combined results of the Company and HealthRider for
the fiscal year ended May 31, 1997. No adjustments were required to conform the
accounting policies of HealthRider to those of the Company. These pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of what would have occurred had the transaction been effected on
the date indicated above or of results which may occur in the future. In
addition, the pro forma summary excludes certain non-recurring charges related
to the HealthRider Acquisition, including a $13,200,000 non-recurring, non-cash
charge resulting from the fact that the Company's purchase accounting included
writing-up the book value of the HealthRider inventory to fair market value less
estimated sales costs. For the fiscal year ended May 31, 1997, pro forma
unaudited net sales were $852,352,000 and the pro forma unaudited net loss was
$18,143,000.
5. ACCOUNTS RECEIVABLE
Accounts receivable, net, consist of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Accounts receivable..................................... $124,687 $131,188
Less allowance for doubtful accounts, advertising
discounts and credit memos............................ (8,219) (6,887)
-------- --------
$116,468 $124,301
======== ========
</TABLE>
F-11
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVENTORIES
Inventories, net, consist of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------- FEBRUARY 26,
1999 1998 2000
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials, principally parts and
supplies................................. $ 42,126 $ 42,609 $ 54,349
Finished goods............................. 64,300 78,857 65,456
-------- -------- --------
$106,426 $121,466 $119,805
======== ======== ========
</TABLE>
Inventories are net of allowances of $4,815,000 and $3,335,000 at May 31,
1999 and 1998, respectively. These allowances are established based on
management's estimates of inventory held at fiscal year end that is potentially
obsolete or for which its market value is below cost.
7. PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31,
ESTIMATED -------------------
USEFUL LIFE 1999 1998
----------- -------- --------
(YEARS)
<S> <C> <C> <C>
Land........................................... -- $ 1,430 $ 1,430
Building and improvements...................... up to 31 16,823 16,675
Equipment...................................... 3-7 69,035 71,293
-------- -------
87,288 89,398
Less accumulated depreciation.................. (42,011) (40,579)
-------- -------
$ 45,277 $48,819
======== =======
</TABLE>
For the fiscal years ended May 31, 1999, 1998 and 1997, the Company recorded
depreciation expense of $15,135,000, $13,698,000 and $11,630,000, respectively.
8. OTHER ASSETS
Other assets consist of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred financing costs, net............................. $ 9,966 $14,112
Deferred advertising costs................................ -- 273
Barter credits............................................ 2,819 2,000
Long-term receivables, net................................ 8,348 3,198
Other..................................................... 2,459 2,375
------- -------
$23,592 $21,958
======= =======
</TABLE>
At May 31, 1999 and 1998, capitalized deferred financing costs are net of
accumulated amortization of $18,598,000 and $11,606,000, respectively.
At May 31, 1999 and 1998, long-term receivables are net of an allowance for
doubtful accounts of $7,981,000 and $3,198,000, respectively.
F-12
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT
Long-term debt consists of the following (table in thousands):
<TABLE>
<CAPTION>
MAY 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Revolving Credit Facility............................... $140,107 $148,488
Term Loan A Facility.................................... 3,912 9,225
Term Loan B Facility.................................... 15,552 15,802
13% Senior Subordinated Notes, face amount $101,250, net
of unamortized discount of $1,226 at May 31, 1999 and
$1,507 at May 31, 1998................................ 100,024 99,743
Other................................................... 984 1,288
-------- --------
260,579 274,546
Less current portion.................................... (7,227) (6,051)
-------- --------
Total long-term debt.................................... $253,352 $268,495
======== ========
</TABLE>
On September 27, 1999, the Company consummated a plan to restructure its
outstanding debt and to refinance its existing bank credit facility. The Company
entered into a new credit facility and consummated exchange offers for all
outstanding 13% Senior Subordinated Notes (Notes 17 and 18). Below is described
the Credit Agreement that was in effect at May 31, 1999 and through
September 23, 1999.
CREDIT AGREEMENT
In 1994, the Company entered into a Credit Agreement with a syndicate of
banks. Borrowings under the Amended and Restated Credit Agreement consist of the
Revolving Credit Facility, the Term Loan A Facility, and the Term Loan B
Facility, and are collateralized by a perfected first priority security interest
in the assets of the Company. Under the terms of the Credit Agreement, the
Company must comply with certain restrictive covenants, which include the
requirement that the Company maintain minimum amounts of profitability, solvency
and liquidity. In addition, the Credit Agreement restricts the Company from
making certain payments, including dividend payments, to its shareholder. At
May 31, 1999, the Company was not in compliance with certain loan covenants of
its Credit Agreement. However, due to the subsequent refinancing of the entire
Credit Agreement (Note 18), outstanding balances of $152,344,000 under the
Credit Agreement as of May 31, 1999 have been classified as long-term.
REVOLVING CREDIT FACILITY
The Credit Agreement provided for borrowings of up to $160,000,000 based
upon a percentage of eligible accounts receivable and inventories. As of
August 23, 1996, the Credit Agreement was amended to permit total borrowings of
up to $310,000,000, with certain changes to the percentage of eligible
receivables and inventory, in order to fund the HealthRider Acquisition
(Note 4), the settlement of the WHF Litigation (Note 14), the Weider Sports and
CanCo Acquisitions (Note 14) and other working capital needs. This Revolving
Credit Facility was due to expire on November 14, 1999 and was replaced on
September 27, 1999 by New Credit Facilities (Note 18). Advances under the
Revolving Credit Facility bear interest, at the Company's option, at either
(1) a margin of 1.50% to 2.50% over the rate
F-13
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
at which certain Eurodollar deposits are offered in the interbank Eurodollar
market (the "LIBOR Rate") or (2) a margin of up to 1.00% over the higher of
(a) the highest of the most recently published or announced prime corporate
base, reference or similar benchmark rate announced by Bankers Trust Company or
(b) the published rate for ninety-day dealer placed commercial paper (the "Index
Rate") (8.15% rate as of May 31, 1999 under the LIBOR Rate option). The
applicable margin is based on the Company's debt service ratio. The Company is
required to pay a fee of between 0.375% to 0.5% per annum on the average unused
commitment under the Revolving Credit Facility. For the fiscal years ended
May 31, 1999, 1998 and 1997, the Company paid an unused commitment fee of
$664,000, $564,000, and $421,000, respectively.
TERM LOAN A FACILITY
Under the Term Loan A Facility, $17,500,000 was advanced on November 14,
1994. Quarterly payments of $937,500, $1,250,000 and $1,562,500 became due
beginning each March 31, 1997, 1998 and 1999, respectively. Quarterly payments
continue at $1,562,500 until maturity on November 14, 1999. Advances under the
Term Loan A Facility bear interest, at the Company's option, at a rate equal to
either (1) a margin of 1.75% to 2.75% over the LIBOR Rate or (2) a margin of
0.25% to 1.25% over the Index Rate (8.42% as of May 31, 1999 under the LIBOR
Rate option).
TERM LOAN B FACILITY
Under the Term Loan B Facility, $17,500,000 was advanced on November 14,
1994. Quarterly payments of $62,500 were due beginning March 31, 1996. Quarterly
payments increase to $1,562,500 beginning March 31, 2000 through September 30,
2001, and the balance of $3,651,691 is due at maturity on November 14, 2001.
Advances under the Term Loan B Facility bear interest, at the Company's option,
at a rate equal to either (1) a margin of 2.25% to 3.25% over the LIBOR Rate or
(2) a margin of 0.75% to 1.75% over the Index Rate (8.92% as of May 31, 1999
under the LIBOR Rate option).
In addition, the Company is required to use the proceeds of permitted sales
of assets to pay down the Term Loan A and Term Loan B Facilities.
SENIOR SUBORDINATED NOTES
In 1994, the Company issued $101,250,000 face amount (net proceeds of
$100.0 million) of 13% Senior Subordinated Notes (the "Senior Subordinated
Notes") and warrants to purchase 200,000 shares of Class A and 20,000 shares of
Class L Common Stock of IHF Capital. The Senior Subordinated Notes are unsecured
and bear interest at 13%, payable January 15 and July 15 through the maturity
date of July 15, 2002. The warrants have an exercise price of $0.01 per share
and expire on November 14, 1999. As of May 31, 1999, no warrants had been
exercised. In conjunction with the sale, $968,000 of the issuance price was
ascribed to the warrants and is included in the total discount on the notes.
This discount is being amortized using the effective interest method.
Upon certain asset sales, the Company may be obligated to purchase the
Senior Subordinated Notes with the net cash proceeds of the asset sales at a
redemption price of 100% of principal plus accrued and unpaid interest. On or
after November 15, 1998, the Senior Subordinated Notes may be redeemed at the
Company's option, in whole or in part, at redemption prices ranging from 110.00%
of
F-14
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
principal amount in the year ended November 14, 1999, plus accrued and unpaid
interest, to 100% of principal amount subsequent to November 14, 2001, plus
accrued and unpaid interest.
The Company did not make the interest payment that was due on July 15, 1999.
However, in connection with the Company's Restructuring (Note 17), the
outstanding accrued interest was settled.
FUTURE PAYMENTS
As of May 31, 1999, due to the Company's noncompliance with certain debt
covenants, all of the Company's debt became currently payable. However, as a
result of the Company's Restructuring (Notes 17 and 18) on September 27, 1999,
the current debt obligations were settled. The table below reflects the
scheduled principal payment term of the new debt (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
<S> <C>
2000........................................................ $ 7,227
2001........................................................ 9,273
2002........................................................ 9,956
2003........................................................ 12,000
2004........................................................ 12,681
Thereafter.................................................. 173,950
</TABLE>
10. STOCKHOLDERS' EQUITY
The Company has 3,000 shares of $.01 par value common stock authorized, and
1,000 shares issued and outstanding.
11. INCOME TAXES
The provision for (benefit from) income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $ -- $ -- $(6,252)
State.......................................... 107 426 (536)
Foreign........................................ 2,457 2,276 1,165
------- ------- -------
Total current................................ 2,564 2,702 (5,623)
------- ------- -------
Deferred:
Federal........................................ 8,224 (7,672) 1,512
State.......................................... 1,286 (1,195) 129
Foreign........................................ 10 268 (6)
------- ------- -------
Total deferred............................... 9,520 (8,599) 1,635
------- ------- -------
$12,084 $(5,897) $(3,988)
======= ======= =======
</TABLE>
F-15
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The components of the Company's pre-tax income (loss) are as follows:
<TABLE>
<CAPTION>
MAY 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Domestic....................................... $(17,150) $(17,948) $(14,000)
Foreign........................................ 4,549 2,517 (1,936)
-------- -------- --------
$(12,601) $(15,431) $(15,936)
======== ======== ========
</TABLE>
The provision for (benefit from) income tax differs from the amount computed
by applying the statutory federal income tax rate to income (loss) before taxes
as follows:
<TABLE>
<CAPTION>
MAY 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate.......................... (35)% (35)% (35)%
State tax benefit.......................................... 8 (2) (3)
Foreign losses for which no benefit has been recognized.... 6 6 11
Other...................................................... -- (7) 2
Change in valuation allowance.............................. 117 -- --
--- --- ---
Provision for (benefit from) income taxes.................. 96 % (38)% (25)%
=== === ===
</TABLE>
As of May 31, 1999 and 1998, the Company recorded gross deferred tax assets
and gross deferred tax liabilities as follows (in thousands):
<TABLE>
<CAPTION>
MAY 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Gross deferred tax assets................................ $ 30,713 $26,686
Gross deferred tax liabilities........................... (6,499) (6,092)
-------- -------
24,214 20,594
Valuation allowance...................................... (17,630) (4,490)
-------- -------
$ 6,584 $16,104
======== =======
</TABLE>
During the fiscal year ended May 31, 1999, the valuation allowance for net
deferred tax assets increased by $13,140,000. The Company has provided a
valuation allowance for deferred tax assets to the extent the Company believes
the realization of the future benefits is not sufficiently assured, primarily
related to the following: (1) net operating loss carryforwards ("NOLs"),
(2) future deductible interest and (3) future deductible stock compensation
expense. In addition, management believes that it is more likely than not that
the Company will generate sufficient future taxable income, primarily due to the
subsequent restructuring of its long-term debt (Note 17), to realize the balance
of the net deferred tax asset at May 31, 1999 prior to expiration of any NOLs.
However, there can be no assurance that the Company will generate any specific
level of taxable income or that it will be able to realize any of the remaining
deferred tax assets in future periods. If the Company were unable to generate
sufficient taxable income in the future through operating or restructuring
results, an additional valuation allowance against this deferred tax asset would
result in a charge to earnings.
F-16
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
At May 31, 1999 and 1998 net deferred tax assets consist of the following
(in thousands):
<TABLE>
<CAPTION>
MAY 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Foreign net operating loss carryforward.................. $ 4,950 $ 4,490
Domestic net operating loss carryforward................. 16,007 9,154
Stock compensation expense............................... 4,146 4,145
Future deductible interest............................... (249) (137)
Depreciation............................................. (2,448) (4,463)
Reserves and allowances.................................. 1,088 5,622
Uniform capitalization of inventory...................... (95) 830
Other, net............................................... 815 953
-------- -------
24,214 20,594
Less valuation allowance................................. (17,630) (4,490)
-------- -------
Net deferred tax asset................................... $ 6,584 $16,104
======== =======
</TABLE>
In the fiscal years ended May 31, 1999, 1998 and 1997, the Company did not
realize any income tax benefits from federal and state net operating loss
carryforwards from the current and prior years.
At May 31, 1999, the Company had approximately $11.0 million of foreign net
operating loss carryforwards which may be carried forward indefinitely and
$44.8 million of domestic net operating loss carryforwards which expire in 2020.
The utilization of these carryforwards may be subject to limitations.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash paid during the period for (in thousands):
Interest paid............................................. $33,979 $32,891 $33,017
Income taxes paid (refunds received), net................. 27 1,505 (685)
</TABLE>
Non-cash investing and financing activities:
During the fiscal year ended May 31, 1999, the Company recorded a non-cash
decrease to additional paid-in capital of $2,367,000 to reflect the settlement
of a receivable from parent through a return of capital to the parent
(Note 14).
13. COMMITMENTS AND CONTINGENCIES
LEASES--The Company has noncancellable operating leases, primarily for
computer and production equipment, that expire over the next five years. These
leases generally contain renewal options for periods ranging from three to five
years and require the Company to pay all executory costs such as
F-17
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
maintenance and insurance. Future minimum payments under noncancellable
operating leases consist of the following at May 31, 1999 (table in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
<S> <C>
2000........................................................ $8,298
2001........................................................ 6,115
2002........................................................ 3,472
2003........................................................ 2,544
2004........................................................ 1,733
Thereafter.................................................. 1,201
</TABLE>
Rental expense under noncancellable operating leases was approximately
$9,550,000, $10,222,000 and $9,373,000 for the fiscal years ended May 31, 1999,
1998, and 1997, respectively.
ENVIRONMENTAL ISSUES--The Company's operations are subject to federal, state
and local environmental and health and safety laws and regulations that impose
workplace standards and limitations on the discharge of pollutants into the
environment and establish standards for the handling, generation, emission,
release discharge, treatment, storage and disposal of certain materials,
substances and wastes. The Company is unaware of any environmental, health or
safety violations.
PRODUCT LIABILITY--Due to the nature of the Company's products, the Company
is subject to product liability claims involving personal injuries allegedly
related to the Company's products. The Company currently carries an
occurrence-based product liability insurance policy. The policy provides
coverage for the period from October 1, 1998 to September 30, 2001 of up to
$25,000,000 per occurrence and $25,000,000 in the aggregate. The current policy
has a deductible on each claim of $250,000 for claims related to trampolines and
$100,000 for claims related to all other products. The Company believes that its
insurance is generally adequate to cover product liability claims. Previously,
the Company maintained similar occurrence based policies with somewhat lower
coverage limits and higher deductibles. Nevertheless, currently pending claims
and any future claims are subject to the uncertainties related to litigation and
the ultimate outcome of any such proceedings or claims cannot be predicted.
On July 14, 1997, in cooperation with the Consumer Products Safety
Commission (the CPSC), the Company recalled approximately 78,000 exercise
machines sold under the brand name, ProForm R-930 SpaceSaver". Riders, Model No.
PFCR6406. The machine was designed to close horizontally for easy storage. In
several reported incidents, when the handle bar was pulled against the seat
during use, the machine unexpectedly closed into the storage position. As such,
consumers were advised to stop using the machine until a free repair kit had
been installed. Any claims filed by a consumer in conjunction with this product
have been and continue to be handled in the normal course of business. While no
assurance can be given, the Company does not believe that it will incur any
material adverse effect relative to this product recall.
On April 15, 1999, in cooperation with the CPSC, the Company recalled
approximately 75,000 exercise machines sold under the brand names, Weider
Shapeglider (Model No. WECR4306), Weider PowerGlide (Model No. WECR4406), and
the Weslo Total Body Trainer (Model No. WLCR4356). In several reported
incidents, the link arm supporting the seat on these exercise gliders
disconnected during use, causing the user to fall abruptly. As such, consumers
were advised to stop using the machine until a free repair kit had been
installed. Any claims filed by a consumer in conjunction with this product have
been and will continue to be handled in the normal course of business. While no
F-18
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
assurance can be given, the Company does not believe that it will incur any
material adverse effect relative to this product recall.
OTHER LITIGATION--The Company is party to a variety of non-product liability
commercial suits involving contract claims and intellectual property claims. The
Company believes that adverse resolution of these suits would not have a
material adverse effect on the Company.
The Company is also involved in several patent infringement claims, arising
in the ordinary course of its business. The Company believes that the ultimate
outcome of these matters will not have a material adverse effect on the Company.
WARRANTY--The Company warrants its products against defects in materials and
workmanship for a period of 90 days after sale to the end-user. As of May 31,
1999 and 1998, the Company had an accrual for warranty costs on products sold of
approximately $2,301,000 and $4,784,000, respectively, included in accrued
expenses.
RETIREMENT PLANS--All employees who have met minimum age and service
requirements are eligible to participate in two 401(k) savings plans. Company
contributions to the two plans for the fiscal years ended May 31, 1999, 1998 and
1997 were $368,000, $384,000 and $374,000 respectively.
INTERNAL REVENUE SERVICE AUDIT--The Company is under examination by the
Internal Revenue Service for its taxable year ended May 31, 1996. This
examination remains in process and has not been completed. Because the Company
carried forward losses claimed on its 1995 tax return to its 1996 return and
carried back losses claimed on its 1997 return to its 1996 return, the IRS, as
part of its examination, is reviewing the Company's tax returns for its
Company's years ended May 31, 1995 and 1997. In connection with this review, the
IRS has given the Company preliminary written notice of its intention to
disallow approximately $26 million of option-related deductions claimed in the
Company's taxable year ended May 31, 1995. Although the Company's taxable year
ended May 31, 1995 is closed due to the statute of limitations, such
disallowances (if successful) would affect the amount of the Company's net
operating loss carryforwards. The Company intends to vigorously and aggressively
defend its position on this issue and believe that the it will prevail. The IRS
has also indicated that it intends to challenge the timing of other deductions
in the Company's taxable year ended May 31, 1997. If the IRS were to prevail in
respect of both these issues, due to the interplay of the Company's net
operating loss carryforwards and carrybacks from other years, there would be a
potential tax liability for the taxable year ended May 31, 1996 in an amount,
through February 29, 2000, of approximately $4.2 million, including interest. In
addition, there would be a substantial reduction in the Company's net operating
loss carryforwards. The IRS has also inquired about the Company's treatment of a
substantial amount of banking, professional and other fees incurred in its
taxable year ended May 31, 1995. The Company is deducting the amount of those
fees over the terms of the debt that was incurred in that year. The IRS has just
recently preliminarily indicated that it intends to disallow the deduction of
such fees and has asked the Company to respond with its position. The Company
believes that a substantial majority of such fees are properly amortizable over
the terms of the debt we incurred in 1995 and is in the process of discussing
with the IRS the merits of its preliminary position. The Company cannot ensure
that the IRS will not raise other issues in the course of its examination.
If the IRS were to prevail in its position that the 1995 option-related and
the 1997 deductions should be disallowed, as noted above, the Company's
available net operating loss carryforwards would be substantially reduced and
there would be a potential liability for the year ended May 1996 of
approximately $4.2 million (including interest calculated through February 29,
2000). Based on
F-19
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
information currently available to the Company, the Company does not believe
that the reduction in its net operating losses should materially adversely
affect our financial condition. However, a reduction in its available net
operating losses could materially adversely affect its financial condition if
the IRS were successfully to assert other issues (including the deductibility of
the 1995 banking, professional and other fees) on audit or if it were to be
determined that the Company recognized additional cancellation of indebtedness
income upon the exchange of the 13% notes for the old notes as a result of the
old notes being determined to have been issued with original issue discount, or
OID. It is the Company's belief that the old notes were not issued with OID and
that, therefore, it did not recognize such additional cancellation of
indebtedness income.
14. RELATED PARTY TRANSACTIONS
SETTLEMENT OF WHF LITIGATION
On September 6, 1996, the Company and WHF and its affiliates settled the
litigation between WHF and certain of its affiliates and the Company and certain
of its officers and directors (the "WHF Litigation") through a number of
agreements (the "WHF Settlement"). The WHF Settlement includes releases of
certain claims previously asserted by WHF and its affiliates, amendments to
certain of the agreements existing between the Company and WHF and its
affiliates and certain new agreements among the Company and WHF and its
affiliates. Other than the releases, the significant terms of the WHF Settlement
are outlined below.
SETTLEMENT EXPENSES AND INTERCOMPANY PAYABLES. The Company: (i) paid
$12,100,000 to terminate the lawsuits; (ii) paid $3,900,000 to WHF and its
affiliates as payment in full under its brand license agreements with them; and
(iii) received $1,200,000 in full payment and settlement of the Company's
payable to WHF and its affiliates ($1,800,000) and amounts due the Company under
the amended Management Agreement ($3,000,000). The Company also received
$500,000 in full payment and settlement of CanCo's Management fee obligations to
the Company under the CanCo Management and Advisory Agreement. As a result of
the above, the Company recorded Weider Settlement expenses of $16,600,000, which
includes the expenses noted in (i) and (ii) and other individually insignificant
settlement expenses totaling $1,100,000, offset by the $500,000 of CanCo
management fees. The Company also recorded the balance reductions noted in
(iii) in its consolidated balance sheet.
PAYMENTS TO MESSRS. WATTERSON AND STEVENSON. In connection with the WHF
Settlement, WHF and its affiliates: (i) paid Messrs. Watterson and Stevenson an
aggregate amount of approximately $4,200,000 in exchange for the surrender of
their options to purchase stock of WHF and its affiliates; and (ii) paid
Messrs. Watterson and Stevenson an aggregate amount of $500,000.
Messrs. Watterson and Stevenson also each received $300,000 in full payment and
settlement of CanCo's management fee obligations under the CanCo Management and
Advisory Agreements.
The WHF Settlement also contained various miscellaneous provisions that the
Company does not believe are material.
MANAGEMENT FEES
The Management Agreement required the Company to the extent applicable, to
source WHF products, or products substantially the same as those sold by WHF,
from WHF prior to seeking sources of those products from outside vendors. During
the fiscal year ended May 1997, the Company
F-20
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
purchased approximately $7,000,000 of products from WHF. In connection with the
WHF Settlement, this agreement was terminated.
The Company executed an agreement with a majority shareholder who provides
management and advisory services. Total annual fees due under this agreement are
$800,000, and, for the fiscal years ended May 31, 1999, 1998 and 1997, the
Company recorded management fee expense of $800,000 each year. In addition, if
the Company enters into any acquisition transactions involving at least
$10,000,000, the Company must pay a fee of approximately 1% of the gross
purchase price, including liabilities assumed, of the transaction. In connection
with the HealthRider Acquisition (Note 4), the Company paid this shareholder
$700,000.
LICENSE FEES
The Company obtained certain rights to use the WHF name pursuant to two
separate exclusive license agreements. Under the Weider Sports License, the
Company paid a $5,000,000 license fee on November 14, 1994 for a perpetual
license with respect to Weider Canadian Trademark Rights. Under the Weider
Health and Fitness license, the Company was required to pay a royalty with
respect to Weider U.S. and other trademark rights equal to 2% of sales of
licensed products sold thereunder until such time as the Company had paid an
aggregate royalty equal to $12,000,000 plus an interest factor accruing on the
unpaid portion of the royalty at a per annum rate of 10%. The Company recorded
license fees of $129,000 during the fiscal year ended May 31, 1997 under this
agreement. In connection with the WHF Settlement, the Company paid $3,900,000 in
exchange for a fully paid-up license with respect to the Weider U.S. and other
trademarks.
DISTRIBUTION AGREEMENT
The Company had appointed a Canadian WHF affiliate to be the exclusive
distributor of ICON Healths products worldwide, excluding the United States,
Mexico and certain countries in Europe. Under the terms of this agreement, the
Company sold its products directly to WHF affiliates for resale in the
agreed-upon territory. In conjunction with this agreement, the Company recorded
revenue of $3,200,000 for the fiscal year ended May 31, 1997. In connection with
the WHF Settlement, the Company paid $8,000,000 to terminate this agreement.
WEIDER SPORTS AND CANCO ACQUISITIONS
In connection with the settlement of the WHF Litigation, the Company
acquired certain assets, excluding cash and fixed assets, for $8,900,000 and
assumed certain liabilities of the sports equipment business lines of Weider
Sports (the "Weider Sports Acquisition"). The terms of the Weider Sports
Acquisition and WHF Settlement also require the Company to provide Ben Weider
with a salary, office space and three assistants for a period of five years
after the acquisition. The estimated costs of this commitment of $2,500,000 were
accrued as part of the purchase accounting for the Weider Sports Acquisition. As
a result of the Weider Sports Acquisition, the Company reacquired distribution
rights originally granted to Weider Sports in connection with the
Recapitalization on November 14, 1994, subject to certain rights granted by
Weider Sports to third parties.
In addition, the Company acquired certain assets, excluding cash, cash
equivalents and accounts receivable, for $1,700,000 and assumed certain
liabilities of three Canadian corporations (collectively, CanCo) (the "CanCo
Acquisition"). The Company also acquired two CanCo plants which were leased
F-21
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
by other WHF affiliates in exchange for the assumption of the existing
$1,500,000 Canadian mortgage on the properties and the payment of $500,000.
The Weider Sports and CanCo Acquisitions have been accounted for under the
purchase method of accounting. Accordingly, the purchase price plus direct costs
of the acquisitions have been allocated to the assets acquired and liabilities
assumed based on their relative fair values as of the closing date. The Weider
Sports and CanCo Acquisitions did not represent acquisitions of significant
businesses by the Company.
AIRCRAFT LEASE
In June 1996, the Company entered into an agreement with FG Aviation, Inc.
("FG"), a company which is jointly owned by officers of the Company, whereby the
Company has committed to lease an airplane from FG. Minimum rentals under the
lease, which expires in May 2005, are approximately $57,000 per month. In
connection with its lease commitments, the Company recorded $864,000 of rental
expense for the fiscal years ended May 31, 1999, 1998, and 1997. Also, the
Company incurred $206,000 and $34,000 of maintenance expense in the fiscal years
ended May 31, 1998 and 1997, respectively. No maintenance expenses were incurred
by the Company for the fiscal year ended May 31, 1999. In addition, the Company
advanced $280,000 to FG as a security deposit on the aircraft lease.
RECEIVABLE FROM PARENT
Through May 31, 1998, IHF Capital had incurred $2,362,000 in expenses and
fees related to its withdrawn public equity offering. In order to fund the
payment for these expenses, the Company advanced IHF Capital $2,362,000 in the
form of a non-interest bearing loan. During the fiscal year ended May 31, 1999,
$5,000 was added to the loan balance for franchise taxes paid on behalf of IHF
Capital. During the fiscal year ended May 31, 1999, the Company determined that
the loan would not be paid in cash due to the Restructuring of the Company
(Note 18), therefore, the loan of $2,367,000 was canceled and the amount was
treated as a return of capital to IHF Capital.
RECEIVABLES FROM OFFICERS
In connection with the exercise of options prior to 1994, the Company
accepted as partial payment, notes bearing interest at the rate of prime plus
0.5%, in the amount of $102,000 from officers. In connection with the purchase
of stock, the Company accepted as partial payment, notes bearing interest at a
per annum rate of 7.5%, in the amount of $656,000 from officers. In the fiscal
year ended May 31, 1997, the Company forgave a total of $102,000 of principal
and $27,000 of accrued interest on these notes. The notes are shown as a
reduction of stockholder's equity (deficit) at May 31, 1999 and 1998.
15. GEOGRAPHIC SEGMENT INFORMATION
In the fiscal year ended May 31, 1999, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. The adoption of SFAS 131 did
not affect the Company's results of operations or financial position.
F-22
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
Based on the Company's method of internal reporting, the Company operates
and reports as a single industry segment, which is development, manufacturing
and distribution of home fitness equipment.
Revenue and long-lived asset information by geographic area as of and for
the fiscal years ended May 31 is as follows (table in thousands):
<TABLE>
<CAPTION>
LONG-LIVED
REVENUES FOR THE YEARS ENDED MAY 31, ASSETS AS OF MAY 31 (NET),
------------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States...................... $648,641 $686,630 $746,007 $70,350 $67,704 $71,500
Foreign............................ 61,608 62,683 90,155 10,674 10,836 7,936
-------- -------- -------- ------- ------- -------
Total........................ $710,249 $749,313 $836,162 $81,024 $78,540 $79,436
======== ======== ======== ======= ======= =======
</TABLE>
Revenues (unaudited) for the nine months ended February 26, 2000 were
$519,905 and $50,938 for the United States and foreign countries, respectively.
Foreign revenue is based on the country in which the sales originate (i.e.
where the legal subsidiary is domiciled). Revenue from no single foreign country
was material to the consolidated revenues of the Company.
16. SUBSEQUENT EVENTS--NEW HOLDING COMPANY
On July 20, 1999, prior to the Restructuring (Note 18), a new holding
company, HF Holdings, Inc. a Delaware corporation ("HF Holdings"), was formed.
Following the Restructuring, a wholly owned subsidiary of HF Holdings merged
with ICON Health, whereupon ICON Health became a wholly owned subsidiary of HF
Holdings.
HF Holdings was formed through equity investments by current shareholders of
IHF Capital, members of Company management and other investors.
17. SUBSEQUENT EVENTS--RESTRUCTURING
On September 27, 1999, the Company consummated an exchange offer (the
"Exchange Offer") for all of its outstanding 13% Senior Subordinated Notes ("13%
Notes"). Significant components of the Exchange Offer are as follows (in
thousands):
The 13% Note holders received:
i. $39,401,000 in cash,
ii. $45,000,000 in new 12% Subordinated Notes ("12% Notes") of ICON Health
(the "Issuer") issued in connection with the exchange offering,
iii. $10,086,000 payment for accrued interest and
iv. warrants to purchase 423,939 shares of HF Holdings common stock for a
nominal exercise price. In addition, rights to purchase an aggregate of
343,336 shares of HF Holdings common stock at a purchase price of $5.83
per share, or an aggregate purchase price of $2,000,000.
In connection with the Exchange Offer, the indentures governing the 13%
Notes were amended to eliminate most of the related restrictive covenant
provisions of the 13% Notes.
F-23
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED)
As of September 27, 1999, noteholders not tendering in the Exchange Offers
totaled $1,500,000 (Note 19). The unexchanged 13% Notes will be subordinated in
right of payment to the payment in full in cash of both the new 12% Notes and
the New Credit Facilities (Note 18).
The new 12% Notes are due September 2005 and are guaranteed by each of the
domestic subsidiaries. Interest will be due each January 15 and July 15 of each
year, beginning on January 15, 2000. The notes are redeemable at any time for a
1-4% premium, as outlined in the indenture. The 12% Notes contain certain
restrictive covenants that, among other things, limit the ability of Icon Health
and its subsidiaries to incur additional debt, pay dividends or make other
distributions make investments, dispose of assets, issue capital stock of
subsidiaries or enter into mergers or consolidations or sell all or
substantially all of its assets.
No gain will be realized on the extinguishment of the 13% Notes. Unamortized
deferred financing fees related to the 13% Notes will be reflected as a
component of the adjustment to establish the carrying value of the 12% Notes.
The Company's subsidiaries Jumpking, Inc., 510152 N.B. Ltd., Universal
Technical Services, Inc. and ICON International Holdings, Inc. ("Subsidiary
Guarantors") have fully and unconditionally guaranteed on a joint and several
basis, the obligation to pay principal and interest with respect to the 12%
Notes. A significant portion of the Issuer's operating income and cashflow is
generated by its subsidiaries. As a result, funds necessary to meet the Issuer's
debt service obligations are provided in part by distributions or advances from
its subsidiaries. Under certain circumstances, contractual and legal
restrictions, as well as the financial condition and operating requirements of
the Issuer's subsidiaries, could limit the Issuer's ability to obtain cash from
its subsidiaries for the purpose of meeting its debt service obligations,
including the payment of principal and interest on the 12% Notes. Although
holders of the 12% Notes will be direct creditors of the Issuer's principal
direct subsidiaries by virtue of the guarantees, the Issuer has indirect
subsidiaries located primarily in Europe ("Non-Guarantor Subsidiaries") that are
not included among the Guarantor Subsidiaries, and such subsidiaries will not be
obligated with respect to the Notes. As a result, the claims of creditors of the
Non-Guarantor Subsidiaries will effectively have priority with respect to the
assets and earnings of such companies over the claims of creditors of the
Issuer, including the holders of the Notes.
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed balance sheets as of February 26, 2000
(unaudited) and May 31, 1999 and 1998 and consolidating condensed
statements of operations and cash flows for the nine months ended
February 26, 2000 (unaudited) and February 27, 1999 (unaudited) and
each of the years in the three year period ended May 31, 1999.
2. The Company ("Issuer"), combined Subsidiary Guarantors and combined
Non-Guarantor Subsidiaries with their investments in subsidiaries
accounted for using the equity method.
3. Elimination entries necessary to consolidate the Parent and all of
its subsidiaries.
F-24
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED)
ICON HEALTH & FITNESS, INC.
SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEET
FEBRUARY 26, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash........................... $ 4,765 $ 3,252 $ 1,654 $ -- $ 9,671
Accounts receivable, net....... 160,762 26,781 8,464 (16,705) 179,302
Inventories, net............... 81,284 29,245 9,624 (348) 119,805
Deferred income taxes.......... 858 227 -- -- 1,085
Other assets................... 6,765 2,241 1,383 -- 10,389
--------- ------- -------- --------- ---------
Total current assets........... 254,434 61,746 21,125 (17,053) 320,252
Property and equipment, net...... 39,591 4,623 400 -- 44,614
Receivable from affiliates....... 49,781 8,613 -- (58,394) --
Trademarks, net.................. 13,458 5,861 1,411 -- 20,730
Deferred income taxes............ 4,145 212 -- -- 4,357
Investment in subsidiaries....... 44,309 -- -- (44,309) --
Other assets..................... 24,577 -- 16 -- 24,593
--------- ------- -------- --------- ---------
Total assets..................... $ 430,295 $81,055 $ 22,952 $(119,756) $ 414,546
========= ======= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term
debt......................... $ 8,354 $ 87 $ -- $ -- $ 8,441
Accounts payable............... 82,400 31,582 15,981 (16,705) 113,258
Interest payable............... 2,662 -- -- -- 2,662
Accrued expenses............... 12,379 1,517 809 -- 14,705
Income taxes payable........... 3,772 (404) 85 -- 3,453
--------- ------- -------- --------- ---------
Total current liabilities.... 109,567 32,782 16,875 (16,705) 142,519
--------- ------- -------- --------- ---------
Long-term debt................... 284,339 -- -- -- 284,339
--------- ------- -------- --------- ---------
Payable to affiliates.......... 34,547 4,427 19,420 (58,394) --
Stockholders' equity (deficit):
Common stock and additional
paid-in capital.............. 232,483 11,097 4,881 (44,306) 204,155
Less: Receivable from officer
for purchases of equity...... (2,200) -- -- -- (2,200)
Accumulated comprehensive
loss......................... -- (20) (1,409) (3) (1,432)
Retained earnings (accumulated
deficit)..................... (228,441) 32,769 (16,815) (348) (212,835)
--------- ------- -------- --------- ---------
Total stockholders' equity
(deficit).................. 1,842 43,846 (13,343) (44,657) (12,312)
--------- ------- -------- --------- ---------
Total liabilities and
stockholders' equity
(deficit)...................... $ 430,295 $81,055 $ 22,952 $(119,756) $ 414,546
========= ======= ======== ========= =========
</TABLE>
F-25
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED)
ICON HEALTH & FITNESS, INC.
SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEET
MAY 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................... $ 2,600 $ 100 $ 1,600 $ -- $ 4,300
Accounts receivable, net........... 87,800 26,500 9,700 (7,500) 116,500
Inventories, net................... 82,200 19,600 4,900 (300) 106,400
Deferred income taxes.............. 600 200 -- -- 800
Other assets....................... 4,700 1,100 500 -- 6,300
Income taxes receivable............ 100 -- -- -- 100
--------- ------- -------- --------- ---------
Total current assets............. 178,000 47,500 16,700 (7,800) 234,400
Property and equipment, net.......... 39,900 4,900 500 -- 45,300
Receivable from parent............... 44,300 -- -- (44,300) --
Trademarks, net...................... 15,300 6,100 1,500 -- 22,900
Deferred income taxes................ 5,600 200 -- -- 5,800
Other assets......................... 23,500 -- -- -- 23,500
--------- ------- -------- --------- ---------
$ 306,600 $58,700 $ 18,700 $ (52,100) $ 331,900
========= ======= ======== ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term
debt............................. $ 7,000 $ 200 $ -- $ -- $ 7,200
Accounts payable................... 74,000 20,100 9,000 (7,500) 95,600
Accrued expenses................... 19,400 1,800 1,400 -- 22,600
Income taxes payable............... -- 900 100 -- 1,000
--------- ------- -------- --------- ---------
Total current liabilities........ 100,400 23,000 10,500 (7,500) 126,400
--------- ------- -------- --------- ---------
Long-term debt....................... 404,100 (4,200) 19,400 (166,000) 253,300
--------- ------- -------- --------- ---------
Stockholder's equity (deficit)
Common stock and additional paid in
capital.......................... 26,200 11,100 4,900 121,700 163,900
Receivables from officers.......... (700) -- -- -- (700)
Accumulated other comprehensive
loss............................. -- (300) (700) -- (1,000)
Accumulated deficit................ (223,400) 29,100 (15,400) (300) (210,000)
--------- ------- -------- --------- ---------
Total stockholder's equity
(deficit)...................... (197,900) 39,900 (11,200) 121,400 (47,800)
--------- ------- -------- --------- ---------
$ 306,600 $58,700 $ 18,700 $ (52,100) $ 331,900
========= ======= ======== ========= =========
</TABLE>
F-26
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED)
ICON HEALTH & FITNESS, INC.
SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEET
MAY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash......................... $ 1,500 $ 100 $ 2,300 $ -- $ 3,900
Accounts receivable, net..... 105,200 22,700 7,000 (10,600) 124,300
Inventories, net............. 95,500 21,300 6,400 (1,800) 121,400
Deferred income taxes........ 11,000 200 -- -- 11,200
Other assets................. 4,700 800 700 -- 6,200
Income taxes receivable...... 300 500 -- -- 800
--------- ------- -------- --------- ---------
Total current assets....... 218,200 45,600 16,400 (12,400) 267,800
Property and equipment, net.... 43,200 4,900 700 -- 48,800
Receivable from parent......... 40,100 -- -- (37,700) 2,400
Trademarks, net................ 10,100 6,500 600 -- 17,200
Deferred income taxes.......... 4,700 200 -- -- 4,900
Other assets................... 21,600 400 -- -- 22,000
--------- ------- -------- --------- ---------
$ 337,900 $57,600 $ 17,700 $ (50,100) $ 363,100
========= ======= ======== ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term
debt....................... $ 6,000 $ 100 $ -- $ -- $ 6,100
Accounts payable............. 70,900 14,500 9,200 (10,600) 84,000
Accrued expenses............. 21,300 2,800 600 -- 24,700
Income taxes payable......... -- -- 200 -- 200
--------- ------- -------- --------- ---------
Total current
liabilities.............. 98,200 17,400 10,000 (10,600) 115,000
--------- ------- -------- --------- ---------
Long-term debt................. 410,600 3,400 18,100 (163,600) 268,500
--------- ------- -------- --------- ---------
Stockholder's equity (Deficit)
Common stock and additional
paid in capital............ 28,500 11,100 700 125,900 166,200
Receivable from officer for
purchase of equity......... (700) -- -- -- (700)
Accumulated other
comprehensive loss......... (100) (100) (400) -- (600)
Accumulated deficit.......... (198,600) 25,800 (10,700) (1,800) (185,300)
--------- ------- -------- --------- ---------
Total stockholder's equity
(deficit)................ (170,900) 36,800 (10,400) 124,100 (20,400)
--------- ------- -------- --------- ---------
$ 337,900 $57,600 $ 17,700 $ (50,100) $ 363,100
========= ======= ======== ========= =========
</TABLE>
F-27
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED)
ICON HEALTH & FITNESS, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED FEBRUARY 26, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales...................... $474,554 $572,705 $23,584 $ -- $570,843
Cost of sales.................. 350,035 49,973 14,516 52 414,576
-------- ------- ------- ------- --------
Gross profit................... 124,519 22,732 9,068 (52) 156,267
Total operating expenses....... 95,923 17,277 9,333 -- 122,533
-------- ------- ------- ------- --------
Income from operations......... 28,596 5,455 (265) (52) 33,734
Interest expense............... 24,000 593 1,018 -- 25,611
Amortization of deferred
financing fees............... 4,730 -- -- -- 4,730
-------- ------- ------- ------- --------
Income (loss) before income
taxes........................ (134) 4,862 (1,283) (52) 3,393
Provision for (benefit from)
income taxes................. 4,948 1,185 110 -- 6,243
-------- ------- ------- ------- --------
Net income (loss).............. $ (5,082) $ 3,677 $(1,393) $ (52) $ (2,850)
======== ======= ======= ======= ========
</TABLE>
F-28
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED)
ICON HEALTH & FITNESS, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED FEBRUARY 27, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales...................... $ 472,465 $ 58,153 $27,618 $ -- $ 558,236
Cost of sales.................. 349,500 37,852 15,635 (1,197) 401,790
--------- -------- ------- ------- ---------
Gross profit................... 122,965 20,301 11,983 1,197 156,446
Total operating expenses....... 98,065 15,488 10,483 -- 124,036
--------- -------- ------- ------- ---------
Income from operations......... 24,900 4,813 1,500 1,197 32,410
Interest expense............... 22,741 770 1,111 -- 24,622
Amortization of deferred
financing fees............... 4,531 -- -- -- 4,531
--------- -------- ------- ------- ---------
Income before income taxes..... (2,372) 4,043 389 1,197 3,257
Provision for income taxes..... (791) 1,297 563 -- 1,069
--------- -------- ------- ------- ---------
Net income..................... $ (1,581) $ 2,746 $ (174) $ 1,197 $ 2,188
========= ======== ======= ======= =========
</TABLE>
F-29
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED)
ICON HEALTH & FITNESS INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales..................................... $586,800 $85,500 $37,900 $ -- $710,200
Cost of sales................................. 435,500 58,400 21,600 (1,500) 514,000
-------- ------- ------- ------- --------
Gross profit.................................. 151,300 27,100 16,300 1,500 196,200
Total operating expenses...................... 132,000 21,100 15,700 -- 168,800
-------- ------- ------- ------- --------
Income from operations........................ 19,300 6,000 600 1,500 27,400
Interest expense.............................. (30,500) (1,000) (1,600) -- (33,100)
Amortization of deferred financing fees....... (7,000) -- -- -- (7,000)
-------- ------- ------- ------- --------
Income (loss) before income taxes............. (18,200) 5,000 (1,000) 1,500 (12,700)
Provision for (benefit from) income taxes..... 9,800 1,600 600 -- 12,000
-------- ------- ------- ------- --------
Net income (loss)........................... $(28,000) $ 3,400 $(1,600) $ 1,500 $(24,700)
======== ======= ======= ======= ========
</TABLE>
ICON HEALTH & FITNESS INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales..................................... $628,100 $80,800 $40,400 $ -- $749,300
Cost of sales................................. 462,300 51,200 24,000 (1,500) 536,000
-------- ------- ------- ------- --------
Gross profit.................................. 165,800 29,600 16,400 1,500 213,300
Total operating expenses...................... 151,000 21,200 17,200 -- 189,400
-------- ------- ------- ------- --------
Income from operations........................ 14,800 8,400 (800) 1,500 23,900
Interest expense.............................. (32,500) (900) (1,700) -- (35,100)
Amortization of deferred financing fees....... (4,800) -- -- -- (4,800)
Other income (expense)........................ 500 -- -- -- 500
-------- ------- ------- ------- --------
Income (loss) before income taxes............. (22,000) 7,500 (2,500) 1,500 (15,500)
Provision for (benefit from) income taxes..... (8,400) 2,300 200 -- (5,900)
-------- ------- ------- ------- --------
Net income (loss)........................... $(13,600) $ 5,200 $(2,700) $ 1,500 $ (9,600)
======== ======= ======= ======= ========
</TABLE>
F-30
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED)
ICON HEALTH & FITNESS INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales..................................... $761,900 $110,900 $40,700 $(77,300) $836,200
Cost of sales................................. 562,600 87,800 24,700 (77,300) 597,800
-------- -------- ------- -------- --------
Gross profit.................................. 199,300 23,100 16,000 -- 238,400
Total operating expenses...................... 186,200 15,300 16,700 -- 218,200
-------- -------- ------- -------- --------
Income from operations........................ 13,100 7,800 (700) -- 20,200
Interest expense.............................. (31,700) (100) (1,800) -- (33,600)
Amortization of deferred financing fees....... (3,000) -- -- -- (3,000)
Other income (expense)........................ 500 -- -- -- 500
-------- -------- ------- -------- --------
Income (loss) before income taxes............. (21,100) 7,700 (2,500) -- (15,900)
Provision for (benefit from) income taxes..... (6,800) 2,600 200 -- (4,000)
-------- -------- ------- -------- --------
Net income (loss)........................... $(14,300) $ 5,100 $(2,700) $ -- $(11,900)
======== ======== ======= ======== ========
</TABLE>
F-31
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSQUENT EVENTS--RESTRUCTURING (CONTINUED)
ICON HEALTH & FITNESS, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 26, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net cash used in operating activities:...... $(49,381) $ 3,709 $ 878 $ 656 $(44,138)
-------- -------- ------- ----- --------
INVESTING ACTIVITIES:
Net cash used in investing activities:...... (12,197) (659) (112) $ -- (12,968)
-------- -------- ------- ----- --------
FINANCING ACTIVITIES:
Proceeds on revolving credit facility....... 419,963 24,319 -- -- 444,282
Payments on revolving credit facility....... (493,943) (28,613) -- -- (522,556)
Proceeds on term notes...................... 180,497 180,497
Payments on term notes...................... (21,271) (21,271)
Payments on other long-term debt............ (40,075) (40,075)
Contributed capital......................... 40,000 40,000
Debt financing fees-equity.................. (4,377) (4,377)
Debt financing fees-debt.................... (13,583) (13,583)
Other....................................... (3,490) 4,164 (18) (656) --
Net cash provided by (used in) financing
activities:............................... 63,721 (130) (18) (656) 62,917
Effect of exchange rate changes on cash....... -- 255 (670) -- (415)
-------- -------- ------- ----- --------
Net increase (decrease) in cash............... 2,143 3,175 78 -- 5,396
Cash, beginning of period..................... 2,622 77 1,576 -- 4,275
-------- -------- ------- ----- --------
Cash, end of period........................... $ 4,765 $ 3,252 $ 1,654 $ -- $ 9,671
======== ======== ======= ===== ========
</TABLE>
F-32
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSQUENT EVENTS--RESTRUCTURING (CONTINUED)
ICON HEALTH & FITNESS, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 27, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net cash used in operating activities:...... $(21,761) (7,043) $(3,565) -- $(32,369)
-------- ------- ------- ----- --------
INVESTING ACITIVITIES:
Net cash used in investing activities:...... (8,240) (678) (136) $ -- (9,054)
-------- ------- ------- ----- --------
FINANCING ACTIVITIES:
Borrowings (payments) on revolving credit
facility, net............................. 46,968 1,132 -- -- 48,100
Other....................................... (12,763) 7,004 3,598 -- (2,161)
-------- ------- ------- ----- --------
Net cash provided by financing
activities:............................... 34,205 8,136 3,598 -- 45,939
-------- ------- ------- ----- --------
Effect of exchange rate changes on cash....... 22 (264) (186) -- (428)
-------- ------- ------- ----- --------
Net increase (decrease) in cash............... 4,226 151 (289) -- 4,088
Cash, beginning of period..................... 1,557 66 2,269 -- 3,892
-------- ------- ------- ----- --------
Cash, end of period........................... $ 5,783 $ 217 $ 1,980 $ -- $ 7,980
======== ======= ======= ===== ========
</TABLE>
F-33
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSQUENT EVENTS--RESTRUCTURING (CONTINUED)
ICON HEALTH & FITNESS, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED MAY 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by (used in) operating
activities:............................... $ 31,000 $ 8,600 $(1,500) $ -- $ 38,100
-------- ------- ------- ----- --------
INVESTING ACTIVITIES:
Net cash provided by (used in) investing
activities:............................... (18,800) (1,100) (200) -- (20,100)
-------- ------- ------- ----- --------
FINANCING ACTIVITIES:
Borrowings (payments) on revolving credit
facility, net............................. (8,200) (7,400) 1,400 -- (14,200)
Other....................................... (2,900) -- -- -- (2,900)
-------- ------- ------- ----- --------
Net cash provided by (used in) financing
activities:............................... (11,100) (7,400) 1,400 -- (17,100)
Effect of exchange rate changes on cash....... -- (100) (400) -- (500)
-------- ------- ------- ----- --------
Net increase (decrease) in cash............... 1,100 -- (700) -- 400
Cash, beginning of period..................... 1,500 100 2,300 -- 3,900
-------- ------- ------- ----- --------
Cash, end of period........................... $ 2,600 $ 100 $ 1,600 $ -- $ 4,300
======== ======= ======= ===== ========
</TABLE>
ICON HEALTH & FITNESS, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED MAY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by (used in) operating
activities:............................... $39,000 $ 5,300 $ 3,300 $ -- $ 47,600
------- ------- ------- ----- --------
INVESTING ACTIVITIES:
Net cash provided by (used in) investing
activities:............................... 6,300 (500) (100) 700 6,400
------- ------- ------- ----- --------
FINANCING ACTIVITIES:
Borrowings (payments) on revolving credit
facility, net............................. (43,600) (5,400) (3,000) (700) (52,700)
Other....................................... (3,000) -- -- -- (3,000)
------- ------- ------- ----- --------
Net cash provided by (used in) financing
activities:............................... (46,600) (5,400) (3,000) (700) (55,700)
Effect of exchange rate changes on cash....... -- 100 (100) -- --
------- ------- ------- ----- --------
Net increase (decrease) in cash............... (1,300) (500) 100 -- (1,700)
Cash, beginning of period..................... 2,800 600 2,200 -- 5,600
------- ------- ------- ----- --------
Cash, end of period........................... $ 1,500 $ 100 $ 2,300 $ -- $ 3,900
======= ======= ======= ===== ========
</TABLE>
F-34
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSQUENT EVENTS--RESTRUCTURING (CONTINUED)
ICON HEALTH & FITNESS, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED MAY 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
ICON HEALTH & GUARANTOR NON-GUARANTOR
FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES :
Net cash provided by (used in) operating
activities:............................... $(27,200) $(7,900) $(2,500) $ -- $(37,600)
-------- ------- ------- ----- --------
INVESTING ACTIVITIES:
Purchase of property and equipment.......... (14,500) (800) (700) -- (16,000)
Purchase of Health Rider.................... (25,800) -- -- -- (25,800)
Purchase of Weider Sports and CanCo......... (11,000) -- -- -- (11,000)
-------- ------- ------- ----- --------
Net cash provided by (used in) operating
activities: (51,400) (800) (700) -- (52,900)
FINANCING ACTIVITIES:
Borrowings (payments) on revolving credit
facility, net............................. 71,200 8,300 3,600 -- 83,100
Other....................................... (5,300) -- -- -- (5,300)
-------- ------- ------- ----- --------
Net cash provided by (used in) financing
activities:............................... 65,900 8,300 3,600 -- 77,800
Effect of exchange rate changes on cash....... (100) (200) (700) -- (1,000)
-------- ------- ------- ----- --------
Net increase (decrease) in cash............... (12,800) (600) (300) -- (13,700)
Cash, beginning of period..................... 15,600 1,200 2,500 -- 19,300
-------- ------- ------- ----- --------
Cash, end of period........................... $ 2,800 $ 600 $ 2,200 $ -- $ 5,600
======== ======= ======= ===== ========
</TABLE>
F-35
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUBSEQUENT EVENTS--NEW CREDIT FACILITIES
In connection with the Restructuring, on September 27, 1999, the Company
entered into new credit facilities (the "New Credit Facilities") of $300,000,000
with a bank and a financial services corporation which consist of the following:
REVOLVER
The Revolver consists of a $120,000,000 revolving credit line, which
includes a letter of credit sub-facility of up to $10,000,000 and may include a
swing line sub-facility of up to $10,000,000. The term is five years. The terms
and conditions include a Clean Down Period to reduce the outstanding borrowings
on the Revolver to $25,000,000 or less for a period of sixty days, or more,
through the period of May 1 through August 31 of each year. In addition,
borrowing availability is limited to certain percentages of qualified assets as
specified in the agreement.
A letter of credit margin of 2% and an unused facility fee of .50% per annum
of the average unused daily balance of the Revolver is due monthly.
TERM LOAN A
The $30,000,000 Term Loan A has a 60 month term and amortizes quarterly at
$2,700,000 in year one, $5,500,000 in years two and three, and $8,200,000 in
years four and five.
TERM LOAN B
The $80,000,000 Term Loan B has a 63 month term and amortizes quarterly at a
rate of $1,100,000 in years one through five and $74,500,000 at maturity.
TERM LOAN C
The $55,000,000 Term Loan C has a 66-month term and amortizes quarterly at a
rate of $400,000 in years one through five and $52,900,000 at maturity.
INVESTMENT PROPERTIES LOAN ("IP LOAN")
The $15,000,000 IP Loan has a 57 month term and amortizes annually at a rate
of $3,000,000 in years one through five.
At the ICON Health's option, all loans will bear interest at either (a) a
floating rate equal to the Index Rate plus the applicable margin of 1.5-5.5% or
(b) a fixed rate for periods of one, two, three or six months equal to the LIBOR
rate plus the applicable margin of 3-7%.
If the Revolver is terminated, Term Loans A, B, C and IP Loan will
immediately be due and payable in full. In addition, if the Revolver is
terminated or if any or all of the Term Loans are prepaid, certain prepayment
premiums will apply.
Proceeds of the New Credit Facility were used to refinance the Company's
existing Credit Agreement and 13% Notes, provide for general working capital,
fund necessary future capital expenditures and fund transaction fees and
expenses. All tranches will be collaterized by a first priority security
interest in all of the existing and subsequently acquired assets of the Company
and its domestic subsidiaries, subject to specified exceptions, and a pledge of
65% of the stock of the Company's foreign subsidiaries. All tranches will be
cross-collateralized and cross-defaulted.
F-36
<PAGE>
ICON HEALTH & FITNESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUBSEQUENT EVENTS--NEW CREDIT FACILITIES (CONTINUED)
As of September 27, 1999, the Company's balance outstanding under the New
Credit Facilities consisted of (table in thousands):
<TABLE>
<S> <C>
Revolver.................................................... $ 45,087
Term Loan A................................................. 30,000
Term Loan B................................................. 80,000
Term Loan C................................................. 55,000
IP Loan..................................................... 15,000
--------
$225,087
========
</TABLE>
A loss of approximately $2.2 million will be recorded on the extinguishment
of the existing credit facility due to the write-off of deferred financing fees.
19. EVENTS SUBSEQUENT TO SEPTEMBER 27, 1999 (UNAUDITED)
In connection with the Recapitalization, $656,000 in nonrecourse loans from
management for the purchase of stock were canceled. The stock collateralizing
such loans was delivered back to the Company.
In connection with the recapitalization, HF Holdings advanced two members of
senior management $2,200,000. The non-recourse notes bear interest at a rate
equal to that of the New Credit Facilities, have a maturity of 10 years and are
collateralized by shares of HF Holdings common stock. The Company advanced to HF
Holdings the amount of the notes.
In connection with the Recapitalization, HF Holdings granted to two members
of senior management 666,700 shares of HF Holdings common stock at no cost. The
Company recognized a compensation charge and contribution of capital of
$3,175,000, the estimated fair value assigned to the common stock grant.
In connection with the Recapitalization, the Company paid bonuses of
approximately $1,000,000 to senior management and loaned $192,000 to members of
junior management. The Company intends to forgive these loans in six months,
subject to continuing employment by junior management. The $192,000 was charged
to expense ratably over the related six-month period.
In connection with the Recapitalization, the Company amended the indentures
governing the 13% notes to delete substantially all restrictive covenants
contained in those indentures. Three affiliated investment funds who did not
tender $1.5 million principal amount of 13% notes filed an action against the
Company, its directors and others seeking compensatory and punitive damages in
an unspecified amount. On May 18, 2000, the Company reached a settlement
agreement with the plaintiffs under which the Company would acquire the $1.5
million principal amount of 13% notes owned by the plaintiffs for a purchase
price of $1,815,000 plus accrued interest, in return for a complete release of
all claims against the defendants.
F-37
<PAGE>
ICON HEALTH & FITNESS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FINANCIAL STATEMENT SCHEDULE II
(IN THOUSANDS)
<TABLE>
<CAPTION>
VALUATION ACCOUNTS
MAY 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE, ALLOWANCES FOR DOUBTFUL ACCOUNTS,
ADVERTISING DISCOUNTS AND CREDIT MEMOS:
Balance at beginning of year................................ $ 6,887 $ 8,953 $ 7,595
Additions:
Charged to costs and expenses (allowance for doubtful
accounts and credit memos).............................. 13,249 4,566 6,027
Charged to costs and expenses (discounts and
advertising)............................................ 19,263 33,234 33,512
Recoveries on accounts charged off........................ 205 22 --
Deductions:
Accounts charged off (allowance for doubtful accounts and
credit memos)........................................... (12,010) (6,478) (3,241)
Accounts charged off (advertising)........................ (19,375) (33,410) (34,940)
-------- -------- --------
Balance at end of year...................................... $ 8,219 $ 6,887 $ 8,953
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
VALUATION ACCOUNTS
MAY 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INVENTORY RESERVE:
Balance at beginning of year................................ $ 3,335 $ 2,761 $ 2,122
Additions:
Charged to cost and expenses (inventory reserve).......... -- 574 639
Charged to cost and expenses (NordicTrack purchase
accounting)............................................. 2,216 -- --
Deductions:
Reduction in reserve...................................... (736) -- --
-------- -------- --------
Balance at end of the year.................................. $ 4,815 $ 3,335 $ 2,761
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
VALUATION ACCOUNTS
MAY 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
LONG-TERM RECEIVABLE, ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance at beginning of year................................ $ 1,602 $ 273 $ 156
Additions:
Charged to costs and expenses............................. 13,136 1,329 117
-------- -------- --------
Balance at end of year...................................... $ 14,738 $ 1,602 $ 273
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
VALUATION ACCOUNTS
MAY 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
WARRANTY RESERVE:
Balance at beginning of year................................ $ 4,783 $ 6,553 $ 2,250
Additions:
Charged to costs and expenses............................. -- -- 4,303
Deductions:
Reduction in reserve...................................... 2,482 1,770 --
-------- -------- --------
Balance..................................................... $ 2,301 $ 4,783 $ 6,553
======== ======== ========
</TABLE>
F-38
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION OR TO MAKE ANY
REPRESENTATION TO YOU THAT IS NOT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED. YOU SHOULD NOT UNDER ANY CIRCUMSTANCES ASSUME THAT THE INFORMATION IN
THIS PROSPECTUS IS CORRECT ON ANY DATE AFTER THE DATE OF THIS PROSPECTUS.
---------------------
$44,282,000
OFFER TO EXCHANGE 12% NOTES
DUE 2005
THAT HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933
FOR OUTSTANDING 12% NOTES
DUE 2005
P R O S P E C T U S
DATED , 2000
---------------------
ICON
HEALTH & FITNESS,
INC.
-------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
ICON is a Delaware corporation. In its Certificate of Incorporation, ICON
has adopted the provisions of Section 102(b)(7) of the Delaware General
Corporation Law (the "Delaware Law"), which enables a corporation in its
original certificate of incorporation or an amendment thereto to eliminate or
limit the personal liability of a director for monetary damages for breach of
the director's fiduciary duty, except (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) pursuant to Section 174 of the Delaware law (providing for
liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions) or (iv) for any transaction from which a director will
personally receive a benefit in money, property or services to which the
director is not legally entitled.
ICON has also adopted indemnification provisions pursuant to Section 145 of
the Delaware Law, which provides that a corporation may indemnify any persons,
including officers and directors, who are, or are threatened to be made, parties
to any threatened, pending or completed legal action, suit or proceedings,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that such person
was an officer, director, employee or agent of the corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. The indemnity may include expenses
(including attorneys fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such officer, director, employee or agent acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to criminal proceedings, had no
reasonable cause to believe that his conduct was unlawful. A Delaware
corporation may indemnify officers or directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against expenses (including attorney's fees) that
such officer or director actually and reasonably incurred.
ICON has entered into indemnification agreements with each of ICON's
officers and directors.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<S> <C>
2.1* Agreement and Plan of Merger dated as of September 27, 1999,
among HF Holdings, ICON Health & Fitness and HF Acquisition,
Inc.
3.1* Certificate of Incorporation of ICON Health & Fitness, Inc.
3.2* By-Laws of ICON Health & Fitness, Inc.
4.1* Indenture, dated September 27, 1999 between ICON Health &
Fitness, Inc., the Subsidiary Guarantors named therein and
the Bank of New York, as Trustee and successor to IBJ
Whitehall and Trust Company.
4.2* Notation of Subsidiary Guarantee dated September 27, 1999.
4.3* Quebec Guaranty dated September 27, 1999 by ICON of
Canada, Inc. in favor of The Bank of New York, as Trustee
and successor to IBJ Whitehall and Trust Company.
4.4* Form of Note between ICON Health & Fitness, Inc and The Bank
of New York, as Trustee and successor to IBJ Whitehall and
Trust Company.
5.1*** Opinion of Willkie Farr and Gallagher.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
10.1* Exchange and Registration Rights Agreement dated
September 27, 1999 by and between ICON Health &
Fitness, Inc., the Subsidiary Guarantors named therein and
the Tendering Holders of 13% Senior Subordinated Notes.
10.2* Credit Agreement dated as of September 24, 1999 among ICON
Health & Fitness, each of HF Holdings, JumpKing, Inc., ICON
International Holdings, Inc., Universal Technical Services,
ICON of Canada Inc. and 510152 N.B. Ltd, the Lenders
signatory thereto from time to time, General Electric
Capital Corporation, as agent for itself and the other
Lenders, and Fleet National Bank, as syndication agent for
itself and the other Lenders.
10.3* Omnibus Amendment Agreement dated as of September 27, 1999
by and among HF Holdings, Credit Suisse First Boston
Corporation ("CSFB"), certain affiliates of Bain
Capital, Inc. ("Bain") and HF Investment Holdings, LLC (the
"LLC").
10.4* Amended and Restated Limited Liability Company Agreement of
the LLC, dated as of September 27, 1999, among Bain and its
designees, Scott Watterson and Gary Stevenson, and CSFB.
10.5* Subscription and Stock Purchase Agreement, dated as of
September 27, 1999, between HF Holdings and the LLC.
10.6* Amended and Restated Securities Purchase Agreement, dated as
of September 27, 1999, among HF Holdings and CSFB.
10.7* Amended and Restated Note Agreement, dated as of
September 27, 1999, between HF Holdings and CSFB.
10.8* Joinder and Supplement to Stockholders Agreement, among
HF Holdings, ICON Health & Fitness and the Employee
Stockholders named therein.
10.9* Amended and Restated Warrant to Purchase Class C Units of
the LLC, issued to Credit Suisse First Boston Corporation,
an affiliate of CSFB, on September 27, 1999.
10.10* Stockholders Agreement, dated as of September 27, 1999,
among HF Holdings, ICON Health & Fitness, the LLC, Bain,
certain Bain designees, Scott Watterson and Gary Stevenson
and CSFB.
10.11* Restated Employment Agreement, dated as of September 27,
1999, between HF Holdings, ICON Health & Fitness and Scott
Watterson.
10.12* Restated Employment Agreement, dated as of September 27,
1999, between HF Holdings, ICON Health & Fitness and Gary
Stevenson.
10.13* Non-Recourse Note, dated as of September 27, 1999, issued to
HF Holdings by Scott Watterson in the principal amount of
$1,209,340.
10.14* Non-Recourse Note, dated as of September 27, 1999, issued to
HF Holdings by Gary Stevenson in the principal amount of
$990,660.
10.15* Pledge and Security Agreement, dated as of September 27,
1999, between HF Holdings and Scott Watterson.
10.16* Pledge and Security Agreement, dated as of September 27,
1999, between HF Holdings and Gary Stevenson.
10.17* 1999 HF Holdings Junior Management Stock Option Plan (the
"Option Plan").
10.18* 1999 ICON Health & Fitness Junior Management Deferred Bonus
Plan.
10.19* Management Agreement, dated as of September 27, 1999, among
HF Holdings, ICON Health & Fitness and a Bain affiliate.
10.20* Management Agreement among ICON Health & Fitness, HF
Holdings and Scott Watterson.
10.21* Management Agreement among ICON Health & Fitness, HF
Holdings and Gary Stevenson.
10.22* Tax Agreement, dated as of September 27, 1999, among HF
Holdings and its subsidiaries.
12.1** Statements re Computation of Ratios
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
21.1* Subsidiaries of Registrant
23.1** Consent of PricewaterhouseCoopers LLP
23.2 Consent of Willkie Farr & Gallagher (included in their
opinion filed as Exhibit 5.1)
24.1 Power of Attorney (included on the signature page of the
registration statement)
25.1* Statement on Form T-1 of Eligibility of Trustee
27.1* Financial Data Schedule (Twelve Months)
27.2* Financial Data Schedule (Three Months)
27.3* Financial Data Schedule (Six Months)
27.4 Financial Data Schedule (Nine Months)
99.1*** Form of Letter of Transmittal
99.2*** Form of Notice of Guaranteed Delivery
99.3*** Form of Letter to Clients
99.4*** Form of Letter to Nominees
</TABLE>
------------------------
* Previously filed.
** Supersedes previously filed exhibit.
*** To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES (SEE ITEM 8)
Schedule II--Valuation and Qualifying Accounts for the Three Years Ended
May 31, 1999
All other schedules are omitted as the required information is not
applicable or is included in the financial statements or related notes or can be
derived from information contained in the consolidated financial statements and
related notes.
REPORTS ON FORM 8-K
A Form 8-K was filed on May 27, 1999.
ITEM 22. UNDERTAKINGS.
Insofar as indemnifications for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 20
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the option of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1993, as amended, and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each
II-3
<PAGE>
filing of an employee benefit plan's annual report pursuant to section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
ii. To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
PROVIDED, HOWEVER, that paragraphs (a)1(i) and (a)(1)(ii) of this
section do not apply if the registration statement is on Form S-3,
Form S-8 or Form F-3, and the information required to be included in
a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Securities and
Exchange Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
2. That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
4. If the Registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial
statements required by Rule 3-19 of this chapter at the start of any
delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Securities Act of 1933, as amended, need not be furnished, PROVIDED that
the Registrant includes in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this
paragraph (4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of
those financial statements. Notwithstanding the
II-4
<PAGE>
foregoing, with respect to registration statements on Form F-3, a
post-effective amendment need not be filed to include financial
statements and information required by Section 10(a)(3) of the
Securities Act of 1933, as amended, or Rule 3-19 of this chapter if such
financial statements and information are contained in periodic reports
filed with or furnished to the Securities and Exchange Commission by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Form F-3.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, ICON Health & Fitness,
Inc. certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing a Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Logan, State of Utah, on the 25th day of July, 2000.
<TABLE>
<S> <C> <C>
ICON HEALTH & FITNESS, INC.
By: /s/ S. FRED BECK
-----------------------------------------
Name: S. Fred Beck
Title: Chief Financial and Accounting
Officer, Vice President and Treasurer
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints each of Gary E.
Stevenson, S. Fred Beck and Everett Smith as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his stead, in any capacities to sign any and all amendments,
including post-effective amendments to this Registration Statement and to file
the same, with all exhibits thereto and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent or his substitute or substitutes may
lawfully do or cause to be done by virture hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board and Chief
------------------------------------------- Executive Officer (Principal July 25, 2000
Scott R. Watterson Executive Officer)
* President and Chief Operating
------------------------------------------- Officer and Director July 25, 2000
Gary E. Stevenson
Chief Financial and Accounting
/s/ S. FRED BECK Officer, Vice President and
------------------------------------------- Treasurer (Principal Financial July 25, 2000
S. Fred Beck and Accounting Officer)
* Vice Chairman of the Board
------------------------------------------- July 25, 2000
Robert C. Gay
* Director
------------------------------------------- July 25, 2000
Ronald P. Mika
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director
------------------------------------------- July 25, 2000
Greg Benson
Director
------------------------------------------- July 25, 2000
David J. Matlin
* Director
------------------------------------------- July 25, 2000
Chris R. Pechock
* Director
------------------------------------------- July 25, 2000
Stanley C. Tuttleman
* Director
------------------------------------------- July 25, 2000
W. McComb Dunwoody
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ S. FRED BECK
--------------------------------------
S. Fred Beck July 25, 2000
(ATTORNEY-IN-FACT)
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, Jumpking, Inc. certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing a Form S-4 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Logan, State of Utah, on the 25th day of July, 2000.
<TABLE>
<S> <C> <C>
JUMPKING, INC.
By: /s/ S. FRED BECK
-----------------------------------------
Name: S. Fred Beck
Title: President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following person in the capacity
and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President and Sole Director
/s/ S. FRED BECK (Principal Executive,
------------------------------------------- Financial and Accounting July 25, 2000
S. Fred Beck Officer)
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, 510152 N.B. Ltd.
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing a Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Logan, State of Utah, on the 25th day of July, 2000.
<TABLE>
<S> <C> <C>
510152 N.B. LTD.
By: *
-----------------------------------------
Name: M. Joseph Brough
Title: President
</TABLE>
Pursuant to the requirement of the Securities Act of 1933, this Registration
Statement has been signed by the following person in the capacity and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President and Sole Director
* (Principal Executive,
------------------------------------------- Financial and Accounting July 25, 2000
M. Joseph Brough Officer)
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ S. FRED BECK
--------------------------------------
S. Fred Beck July 25, 2000
(ATTORNEY-IN-FACT)
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, Universal Technical
Services, Inc. certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing a Form S-4 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Logan, State of Utah, on the 25th day of July,
2000.
<TABLE>
<S> <C> <C>
UNIVERSAL TECHNICAL SERVICES, INC.
By: *
-----------------------------------------
Name: Gary E. Stevenson
Title: President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President and Director
------------------------------------------- (Principal Executive Officer) July 25, 2000
Gary E. Stevenson
/s/ S. FRED BECK Assistant Secretary and Director
------------------------------------------- (Principal Financial and July 25, 2000
S. Fred Beck Accounting Officer)
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ S. FRED BECK
--------------------------------------
S. Fred Beck July 25, 2000
(ATTORNEY-IN-FACT)
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, ICON International
Holdings, Inc. certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing a Form S-4 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Logan, State of Utah, on the 25th day of July,
2000.
<TABLE>
<S> <C> <C>
ICON INTERNATIONAL HOLDINGS, INC.
By: *
-----------------------------------------
Name: Gary E. Stevenson
Title: President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President and Director
------------------------------------------- (Principal Executive Officer) July 25, 2000
Gary E. Stevenson
/s/ S. FRED BECK Treasurer and Director
------------------------------------------- (Principal Financial and July 25, 2000
S. Fred Beck Accounting Officer)
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ S. FRED BECK
--------------------------------------
S. Fred Beck July 25, 2000
(ATTORNEY-IN-FACT)
</TABLE>
II-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ ------------------------------------------------------------
<C> <S>
2.1* Agreement and Plan of Merger, dated as of September 27,
1999, among HF Holdings, ICON Health & Fitness and HF
Acquisition, Inc.
3.1* Certificate of Incorporation of ICON Health & Fitness, Inc.
3.2* By-Laws of ICON Health & Fitness, Inc.
4.1* Indenture, dated September 27, 1999 between ICON Health &
Fitness, Inc., the Subsidiary Guarantors named therein and
the Bank of New York, as Trustee and successor to IBJ
Whitehall and Trust Company.
4.2* Notation of Subsidiary Guarantee dated September 27, 1999.
4.3* Quebec Guaranty dated September 27, 1999 by ICON of Canada,
Inc. in favor of The Bank of New York, as Trustee and
successor to IBJ Whitehall and Trust Company.
4.4* Form of Note between ICON Health & Fitness, Inc and The Bank
of New York, as Trustee and successor to IBJ Whitehall and
Trust Company.
5.1*** Opinion of Willkie Farr and Gallagher.
10.1* Exchange and Registration Rights Agreement dated
September 27, 1999 by and between ICON Health &
Fitness, Inc., the Subsidiary Guarantors named therein and
the Tendering Holders of 13% Senior Subordinated Notes.
10.2* Credit Agreement dated as of September 24, 1999 among ICON
Health & Fitness, each of HF Holdings, JumpKing, Inc., ICON
International Holdings, Inc., Universal Technical Services,
ICON of Canada Inc. and 510152 N.B. Ltd, the Lenders
signatory thereto from time to time, General Electric
Capital Corporation, as agent for itself and the other
Lenders, and Fleet National Bank, as syndication agent for
itself and the other Lenders.
10.3* Omnibus Amendment Agreement dated as of September 27, 1999
by and among HF Holdings, Credit Suisse First Boston
Corporation ("CSFB"), certain affiliates of Bain
Capital, Inc. ("Bain") and HF Investment Holdings, LLC (the
"LLC").
10.4* Amended and Restated Limited Liability Company Agreement of
the LLC, dated as of September 27, 1999, among Bain and its
designees, Scott Watterson and Gary Stevenson, and CSFB.
10.5* Subscription and Stock Purchase Agreement, dated as of
September 27, 1999, between HF Holdings and the LLC.
10.6* Amended and Restated Securities Purchase Agreement, dated as
of September 27, 1999, among HF Holdings and CSFB.
10.7* Amended and Restated Note Agreement, dated as of
September 27, 1999, between HF Holdings and CSFB.
10.8* Joinder and Supplement to Stockholders Agreement, among
HF Holdings, ICON Health & Fitness and the Employee
Stockholders named therein.
10.9* Amended and Restated Warrant to Purchase Class C Units of
the LLC, issued to Credit Suisse First Boston Corporation,
an affiliate of CSFB, on September 27, 1999.
10.10* Stockholders Agreement, dated as of September 27, 1999,
among HF Holdings, ICON Health & Fitness, the LLC, Bain,
certain Bain designees, Scott Watterson and Gary Stevenson
and CSFB.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ ------------------------------------------------------------
<C> <S>
10.11* Restated Employment Agreement, dated as of September 27,
1999, between HF Holdings, ICON Health & Fitness and Scott
Watterson.
10.12* Restated Employment Agreement, dated as of September 27,
1999, between HF Holdings, ICON Health & Fitness and Gary
Stevenson.
10.13* Non-Recourse Note, dated as of September 27, 1999, issued to
HF Holdings by Scott Watterson in the principal amount of
$1,209,340.
10.14* Non-Recourse Note, dated as of September 27, 1999, issued to
HF Holdings by Gary Stevenson in the principal amount of
$990,660.
10.15* Pledge and Security Agreement, dated as of September 27,
1999, between HF Holdings and Scott Watterson.
10.16* Pledge and Security Agreement, dated as of September 27,
1999, between HF Holdings and Gary Stevenson.
10.17* 1999 HF Holdings Junior Management Stock Option Plan (the
"Option Plan").
10.18* 1999 ICON Health & Fitness Junior Management Deferred Bonus
Plan.
10.19* Management Agreement, dated as of September 27, 1999, among
HF Holdings, ICON Health & Fitness and a Bain affiliate.
10.20* Management Agreement among ICON Health & Fitness, HF
Holdings and Scott Watterson.
10.21* Management Agreement among ICON Health & Fitness, HF
Holdings and Gary Stevenson.
10.22* Tax Agreement, dated as of September 27, 1999, among HF
Holdings and its subsidiaries.
12.1** Statements re Computation of Ratios
21.1* Subsidiaries of Registrant
23.1** Consent of PricewaterhouseCoopers
23.2 Consent of Willkie Farr & Gallagher (included in their
opinion filed as Exhibit 5.1)
24.1 Power of Attorney (included on the signature page of the
registration statement)
25.1* Statement on Form T-1 of Eligibility of Trustee
27.1* Financial Data Schedule (Twelve Months)
27.2* Financial Data Schedule (Three Months)
27.3* Financial Data Schedule (Six Months)
27.4 Financial Data Schedule (Nine Months)
99.1*** Form of Letter of Transmittal
99.2*** Form of Notice of Guaranteed Delivery
99.3*** Form of Letter to Clients
99.4*** Form of Letter to Nominees
</TABLE>
------------------------
* Previously filed.
** Supersedes previously filed exhibit.
*** To be filed by amendment.
